[Investopedia] Stratasys Stock Down 50% Since Start of 2014: Is It Time to Buy?

Over the last 14 months, Stratasys' (SSYS 1.44%) stock performance hasn't been one of the company's proudest moments: The stock has underperformed Mr. Market by about 65% during this time. Consequently, a big question for prospective Stratasys investors is whether this unfavorable treatment offers a favorable buying opportunity for patient, long-term investors.

SSYS data by YCharts

Possible sources of pain
Looking back, there were likely several factors that contributed to Stratasys' underperformance:

• Valuation. Going into 2014, Stratasys may have commanded a difficult-to-justify valuation for investors to believe shares were trading at an opportune price relative to the company's future prospects and earnings potential.

Source: YCharts.

• Changes in sentiment. As measured by a rise in short interest, or the total number of shares that are actively being sold short, it's possible that a general increase in bearishness may have contributed to Stratasys' underperformance.

SSYS Short Interest data by YCharts

• Guidance revisions. Although Stratasys raised its 2014 full-year earnings guidance when it released its second-quarter 2014 results, the company has since downwardly revised its earnings guidance on two occasions. The company first adjusted its 2014 full-year earnings-per-share guidance range by $0.04 lower as a result of its recent GrabCAD acquisition, and more recently warned that its fourth-quarter and full-year 2014 results won't meet expectations due to the underperformance of its MakerBot unit. In the context of Stratasys' rich valuation, it's possible that these downward revisions may have made investors wary about its nearer-term earnings prospects.  

Reasons to buy
Although the past 14 months have been rough for Stratasys investors performance-wise, there are still plenty of reasons to get excited about its longer-term prospects:

• Large installed base. Because Stratasys primarily operates under a razor-and-blade model, where the 3D printers are its razors and proprietary consumables are its blades, the company has tremendous potential to generate streams of high-margin revenue from the sales of its consumables over its printers' life cycles. According to management, Stratasys boasts the largest installed base of 3D printers in the industry, which at last tally stood at 110,494 shipped between the Stratasys, Objet, and MakerBot brands since their respective inceptions. To put the power of its massive installed base into perspective, Stratasys' consumable revenues increased by 32% year over year in the third quarter of 2014.
  
• Focused management. Based on its acquisition history, Stratasys' management has demonstrated that it's more focused on making acquisitions that either enhance or complement its core offerings than in taking a "shotgun approach" to its market opportunity and seeing what sticks. Over the years, the company has made several notable acquisitions, including Objet, MakerBot, GrabCAD, and Solid Concepts, in an effort to bolster its expertise and leadership throughout the industry.  
  
• Large R&D commitment. Last quarter, approximately 11.5% of Stratasys' revenue was dedicated to research and development spending -- $23.4 million -- the most of any 3D printing company in the industry, on an absolute basis. In other words, Stratasys is taking its commitment to driving future innovation and maintaining its technological leadership very seriously.
  
• A clean, strong balance sheet. With $458.9 million in cash and $50 million in short-term revolving debt as of its third quarter, Stratasys has ample cash to pursue its market opportunity, invest in future innovation, and weather major threats from unanticipated sources.

Reasons to avoid
Looking ahead, there could be several factors that may make investors want to avoid Stratasys' stock:

• Valuation (still) high. Even after Stratasys sold off 38% in 2014, and another 20% year to date as of this writing, it's difficult for investors to call Stratasys a conventionally cheap stock -- a factor that may limit its upside potential, even if it delivers on its promise of long-term earnings growth.

Source: YCharts.

• Likely pricing-pressures headwinds. Although the expectation is that the 3D printing industry will experience explosive growth over the next few years, it's expected to come at the expense of falling average selling prices. Insights firm IDC believes that 3D printer prices will fall dramatically in the coming years, which may put a damper on Stratasys' gross profit margin, depending on severity and the company's overall product mix.

 

Source: IDC.

• Disruption. Compared to traditional manufacturing, 3D printing as a manufacturing process is inferior in terms of speed, surface quality, and the number of applications it can target, meaning the stakes for developing a disruptive technology are extremely high across the industry. After all, the 3D printing industry is expected to grow by over 31% per year through 2020 to eventually generate more than $21 billion in worldwide revenues -- making disruption a threat that's too big for Stratasys investors to ignore.

Buy, sell, or hold?
Given its large installed base of 3D printers, a management team that's committed to its future, and war chest of cash, there appears to be a solid foundation for Stratasys' stock to be an outperformer over the long term. However, as the last 14 months have shown, Stratasys isn't an investment that is free from risks and should only be considered for investors that are willing to tolerate high volatility. If you're so inclined, Stratasys could still be in a good position to outperform its 3D printing peers over the next three to five years.