UPDATE: This Stratasys article has been updated following the results of the July 30th, 2015 Q2 earnings call.
Down 75% from its peak and trading at 60% of book, Stratasys SSYS has become a value stock in a growth industry. Clearly, fears of share loss, platform obsolescence, and/or commoditization have discouraged investors. To justify this valuation, however, Stratasys’s market share loss during the next few years would have to be dramatic.
Joining Stratasys, share prices of 3D printing manufacturers 3D Systems DDD and ExOne XONE also fell over 75% since their peaks in the last year, but contrary to these stocks’ recent behavior, the 3D printing industry still is in a rapid growth phase. Analysts expect the market to grow by 20-54% per year between 2015 and 2020 and, as shown below, Wohler’s estimates have been revised up roughly three-fold during the past two years.
Based on these estimates, there is room for growth for all players in the industry. With 18% share of the entire printer market, and more than 50% of the more profitable industrial printer market 1, Stratasys should be poised to benefit from the anticipated boom in 3D printing, even if it loses significant market share.
Stratasys’s market cap is $1.7 billion (as of 7.6.15.), a fraction of the $12-56 billion in revenues that the industry could generate by 2020. In the worst case scenario, as shown below, if Stratasys were to lose up to 80% of its market share and its price-to-sales ratio were to erode from 2.2 to 1, its stock would end up at today’s price in 2020. In other words, thanks to growth in the 3D printing market, SSYS could “run in place”, even in the face of horrible headwinds. Alternatively, if Stratasys were to maintain its current market share and price-to-sales ratio, its stock would appreciate somewhere between 3- and 14-fold. If it were to gain share, just imagine … [sources for graph:2]
Stratasys could lose significant market share in several scenarios, chief among them commoditization and technological obsolescence. Many analysts point to Hewlett-Packard HPQ as a major competitive threat. Interestingly and perhaps curiously, HP had exposure to the 3D printing industry from 2010 to 2012, through a distribution partnership with Stratasys. The partnership ended because its go-to-market strategy was ineffective: it certainly didn’t connect with Stratasys’s industrial base.
While HP’s new technology appears promising, it is not scheduled to launch until 2016, and likely will target commercial service centers as opposed to Stratasys’s industrial base. HP also plans to open-source 3D printing materials, which has caused some concern that sales of Stratasys’s materials will face commoditization. At the low end of the consumer market, commoditization of materials is already occurring.3 For high-end industrial applications, however, materials are crucial to the quality of the high precision products, making cheap alternatives problematic and impractical. Stratasys has secured contracts in many industries that have exacting standards. Its auto and aerospace customers, for example, put suppliers through long and rigorous approval processes, which would make switching from Stratasys time consuming and quite costly.
While 3D printing faces short-term economic and competitive headwinds, its long-term growth potential is much stronger than is reflected by the discounted price at which Stratasys’s stock is currently trading. In fact, during the first and second quarter, despite the downdraft in its hardware sales, Stratasys reported that consumable sales grew 25% and 13%4, respectively, suggesting that the capacity utilization of existing printers increased significantly. Stratasys printers are far from obsolete. Though still in its infancy, 3D printing has the potential to collapse the time between design and production, streamline supply chain management, cut costs, and spur new applications that are unfathomable today.
- Call with Stratasys Investor Relations (5/15/15). Market share is calculated with 2014 Stratasys sales divided by Wohler’s estimate for the market size (4.1B). ↩
- Links to sources:
- Call with Stratasys Investor Relations. (5/15/15) ↩
- This is in constant currency. Core business consumables were up 19% year over year for the second quarter. ↩
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