A few days back, I was reading a news article that described the ongoing research about 3D printed homes and it surprised me to a considerable extent. Well, it is true that the notion of 3D printed homes is far-fetched but it is possible and more than the probability of achieving such a goal, the story highlighted the massive potential embedded in the 3D printing industry. Stratasys, the global leader in 3D printing also has a highly optimistic outlook regarding the future prospects of this industry.
A step forward
Recently, the company unveiled its game changer product, a multi-material 3D printer that combines colours with multi-material printing in a single run and is expected to revolutionize aspects of product design and manufacturing processes. This printer is estimated to reduce the time required to bring prototypes into the market by approximately 50 percent which is a remarkable feat. Innovation is the indispensable fuel that keeps a technology company running and Stratasys has exhibited a strong culture of efficient innovation.
- Warning! GuruFocus has detected 3 Warning Signs with SSYS. Click here to check it out.
- SSYS 15-Year Financial Data
- The intrinsic value of SSYS
- Peter Lynch Chart of SSYS
Getting big with Makerbot
Analysts on the Wall Street have criticized Stratasys’ slow responsiveness to market changes and competitive dynamics. The acquisition of Makerbot, for which the company paid around $403 million has been claimed an overvalued deal as the company paid around 40 times the initial valuation of Makerbot. Though Stratasys had made an excess payment to an extent for acquiring Makerbot, it was the best way to enter the consumer 3D printing markets. The acquisition absolutely fits into Stratasys’ plan of owning the 3D printing space.
Additionally, Makerbot’s 3D printers start at a price of around $2K while Stratasys cheapest printer cost $10K and this acquisition would give Stratasys the much needed pricing leverage that is needed to stay in consumer 3D printing markets. The decision to buy out Makerbot is also valid because one of Stratasys’ oldest and fiercest competitor 3D systems (the pioneer of this industry) is already a major player in consumer 3D printing business. Makerbot’s recent deal with Dell to offer 3D printers and scanners to small and mid-sized businesses marks the start of benefits that will accrue to Stratasys in the long run.
The duel with 3D systems
As I mentioned above, one of Stratasys’ biggest rivals and dominant player in the industry is 3D systems. The company is the initiator of the 3D printing concept and has maintained its position in the industry by creating multiple entry barriers in form of pricing strategies, litigation and robust product portfolio.
Of late the confidence in 3D systems has been on a decline as the company has made some erratic acquisitions in the past in a bid to achieve quick growth but these have not churned out any commendable result. Apparently, 3D systems has overestimated the rate of this industry’s growth and hence, invested in ideas that are ahead of time.
The stock plummeted 15% in a day after the announcement of 2013 guidance because like the company itself, investors have also put immense confidence in the scope of 3D printing. As such, the unloading of shares will continue till the market completely discounts the overvaluation factor.
It can be noted that the recent price fall in 3D systems cannot be construed as a sign of a bursting 3D bubble because the aspects of 3D printing industry growth do not align with that of an overvalued bubble. I agree that the stock faced a price correction but the reason behind it is the company’s fast-moving acquisition spree that is yielding insignificant results. Also, unlike the dot-com bubble of 2000, the 3D printing industry has much lesser players and robust entry barriers in place which will push the companies to set realistic goals and achieve them.
Stratasys has also delivered a cautionary guidance especially with respect to operating expenses which will see a healthy increase during the year 2014. However, the synergy from Objet and Makerbot deals has instilled confidence in the management in respect of sales and revenue.
Though the guidance from Stratasys has a rosy outlook, it has also contained investor expectations. It is quite clear that Makerbot will be the cornerstone of growth for Stratasys in 2014 as the former has an established product portfolio in the consumer 3D printing space along with a strong research and development team. Hence, Makerbot can work towards establishing dominance on the consumer side by offering an affordable range of printers.
3D printing industry is currently in its early stages and investors have flocked to this sector because of the glamorous future opportunities. As a result, misguided valuation has become a buzz word in the industry and it is becoming difficult to measure the actual worth of these opportunities. Even Stratasys is trading at a 50x multiple based on EPS guidance provided by the company for 2014.
In my opinion, it is prudent to hold off putting money in Stratasys for a while and understand the full impact of integration of Makerbot to its product portfolio because the latter sells its printers at lower operating margins. Thus, a full-fledged integration of Makerbot and clarity in prospects of this industry will be a good point for entry of investors.