Stratasys (SSYS, Financial) and 3D Systems (DDD, Financial) are no longer among the hottest stocks on Wall Street. In fact, these 3D printing companies are among the worst-performing stocks in the market this year, having continued with their spiral declines which effectively began at the start of 2014.
On the contrary, the 3D printing industry has continued to rise and is tipped to reach $17 billion by the year 2020. The growth in the 3D printing industry is what inspired the two-year rally from 2012 to 2014 that these two companies enjoyed as investors rushed to buy shares at cheap valuations.
In the most recent quarter, the two companies posted dismal results that highlighted the performances of the last few quarters as losses ballooned while revenues continued to slow.
Shareholders of Stratasys have lost 67% in value year to date while their counterparts at 3D Systems have seen their holdings decline by 68%.
As of January 2014, shares of Stratasys were trading at about $136 per share while 3D Systems stock traded at about $97. Since then they have declined 80% and 90%, representing a massive loss to investors.
So what has been eating SSYS and DDD?
First let's look at Stratasys. On Nov. 4, the company reported 17.6% decline in revenues for the most recent quarter compared to the same period last year.
The drop in the top line certainly highlights the company’s continuing squeeze, but the bottom line was even worse after losses ballooned to $938 million from $31.3 million reported a year ago. This was mainly due to a massive goodwill impairment write-down in relation to the company’s merger with MakerBot in $403 million combined deal in June 2013, along with effects of a tough business environment in the 3D industry.
The company is also currently involved in a copyright lawsuit against local Minnesota-based neighbor Afinia, which rebrands 3D printers from Chinese manufacturer Tiertime and sells them at a discount price to Stratasys' printers.
Stratasys revenues have been declining gradually this year as demonstrated in the chart below, while the net loss has widened again on a sequential basis after posting a massive rebound in Q2.
Onn the other hand, 3D Systems profits have been experiencing a gradual decline, which contrasts the behavior of Stratasys' losses, but the top line cuts a similar trend going back to 2013.
In the third quarter, which by the way is not reflected in the chart above, the company reported a 9% sequential decline in revenues falling to $151 million. 3D Systems is also facing litigation challenges and recently made unwanted headlines following the forced resignation of CEO Avi Reichental, the man behind the wheels during the company’s acquisition binge period, which saw it add various technologies and startups to its portfolio of assets. The situation at 3D Systems is so dire that the company has actually refused to provide guidance on earnings for the coming quarters.
Now, notice that while revenues of both companies have shown some weakness in the last few quarters, there was incremental growth up until Q4 last year. During that period, profits/losses did not indicate any significant changes, at least not in the same direction as revenues.
This indicates that the two companies have been facing operational challenges that have made it difficult to grow profits despite significant improvement in top line. For instance, 3D Systems has a negative operating margin of 11% for the trailing 12-month period, compared to a gross profit margin of 48% while Stratasys figures stand at -22% and 41%.
With regard to net profits, it is clear that Stratasys' merger with MakerBot is not helping much. The goodwill impairment write-downs are symptoms of a company that expanded rapidly without assessing the market situation carefully to see whether conditions supported the need for expansion.
The 3D industry appeared very promising a few years ago with some suggesting that it could be effectively applied in the manufacturing industry to design and manufacture various products. However, companies have only managed to use it to manufacture prototype products in industrial plants. There is also a big question on whether or not 3D printing as a business can actually be marketed on a consumer level.
In addition, Stratasys and 3D Systems are facing fierce competition from other 3D companies from China, which are able to produce and sell similar or superior products at cheaper prices. This is going to squeeze the market for the two companies thereby resulting in more declines in the top line.
Conclusion
Based on the current P/S ratios of 1.88x for 3D Systems and 1.91x for Stratasys, the two companies appear to be fairly valued compared to the industry average of 1.88x.
However, investors are not buoyed by this and have been short-selling the two stocks massively over the last few months. For instance, as of Oct. 15, Stratasys had 26.97% of the floated shares being sold short while 3D Systems had a short sale rate of 32.34% of the float.
Therefore, there is a lot that is eating into the two companies’ market valuations. The industry still looks bright, but the conditions are tough especially for Stratasys and 3D Systems. In addition, industry giants in the technology market are also expressing interest with HP Inc. (HPI, Financial) and Autodesk (ADSK, Financial) among others, set to announce their entry into 3D printing manufacturing.
