The broader US markets currently appear to be positioned at an inflexion point. With the economy seeing significant recovery and momentum post the 2020 recession, driven by unprecedented monetary and fiscal stimulus, inflation concerns are now mounting creating a conundrum for the markets. While markets have priced in the recovery, it has not factored the possibility of inflation overshooting. If inflation does turn out to be more than just ‘transitory’,contrary to the Federal Reserve’s expectations, the markets can be very volatile, and hence investors need to carefully pick and choose investments and have a long-term perspective. Given this context, investors with an appetite for high risk-high reward investments can make a thematic bet in the Nasdaq listed Stratasys Ltd (SSYS). Thematic bets will take longer periods to play out and hence investors must be willing to wait it out and be ready to tide through the volatility.
About the company
SSYS is an American-Israeli company and is a global leader in connected, polymer based 3D printing solutions, across the entire manufacturing value chain. SSYS is one of the pioneers and largest pure-play companies in the 3D printing space, with potential to ride the 3D printing theme which may play out over the next decade, driven by disruptive technologies expanding its scope and reducing costs. As per its filings, it has the industry’s largest offering of innovative 3D printing technology platforms. Its revenue model is driven by providing 3D printing solutions - sales of 3D printing systems and consumables, software, allied services and mass production. Its main competitors are 3D Systems Corporation (DDD), HP, Carbon 3D and Desktop Metal. Amongst pure play companies, SSYS and DDD (which has revenues around same level as SSYS) corner around 75 per cent of the revenues. It is geographically well diversified with around 65 per cent revenue from Americas (US, Canada and Latin America) and balance from rest of the world.
Sector and theme
While 3D printing as a concept has been around since the 1980s, it could not progress much for a long time due to lack of supportive ecosystem encompassing materials and technology. Hence its use was mostly restricted to industry prototyping applications. While still in early stages, the industry took off exponentially in the mid 2000s as tech ecosystem flourished (software, graphics, artificial intelligence, internet etc). The range of materials increased dramatically, making it possible to create high-resolution, strong and functional products that are ready for end use. It now finds uses across diverse fields like aerospace, automotive, electronics and medical. Its main advantage over traditional manufacturing is that time, efforts and costs to create complex designs are comparatively lower, making it possible to produce highly optimized products without being bogged down by manufacturing costs. Also since it is software driven, it reduces the need for skilled expertise, offering opportunities to businesses without manufacturing expertise. For example when there was severe shortage of PPE during early stages of the Covid pandemic, non-traditional manufacturers helped address the shortages using 3D printing.
Internet and technology was expected to revolutionize the world in the early 2000s ( dotcom boom) but it played out on a large scale a decade later, since 2010. Similarly, 3D printing too might be at the cusp of a revolution in the current decade, after expectations of a boom in early part of last decade faltered. According to ARK Investment Management - a leading investor with over $50bn in AUM - and famous for its early calls on stocks like Tesla, the concept failed last decade as companies focussed more on consumer side use cases instead of industrial. With industry having re-oriented now by focussing on industrial segment, according to their research, it is now at a cusp and they expect the market to grow at a 60 per cent CAGR from around 12 billion now to $120 billion by 2025. While ARK has some critics too for being overly bullish, their exceptional performance over recent years means their views cannot be ignored. According to a BCG report, the market is likely to reach a size of $51 billion by 2025 which would still imply a exponential CAGR of 34 per cent. This apart, it is undeniable that the ecosystem encompassing technology and materials have also made substantial strides since the earlier bubble in 3D printing, making a strong case for the theme to gain traction in the current decade.
Financials
During FY20, SSYS financials were impacted by lockdowns in different parts of the world during different phases of the Covid wave. Its revenues declined by 18 per cent to $521 million (in comparison, its closest peer DDD reported revenue decline of 12 per cent). While it has been modestly free cash flow positive in all years except for one in the last 5 years, it is yet to reach profitability at an EPS level. Given the focus is on its potential as leading player to capitalize on a theme if and when it plays out, its lack of profitability should not be a deterrent, considering its very solid net cash position (40 per cent of current market cap)
Consensus (Bloomberg) expectations are for its revenue to grow at CAGR of 9-10 per cent between FY20-22. This may indicate that higher growth for industry/company may be more back-ended and investors must be ready to wait it out.
Valuation
Given its lack of profitability, EV/Sales would be a more appropriate metric to value SSYS. It currently trades at FY21 Enterprise Value (EV)/Sales of 1.3 times – not expensive for a company that can potentially ride a theme (DDD trades at 4.1 times). Also with net cash in balance sheet at 40 per cent of market cap, there is strong downside support.It also positions the company well to tide through any uncertainties in the evolution of the industry and make the right investments to remain competitive. Given it’s a leader amongst pure play companies in the sector with deep expertise and intellectual property, larger companies trying to enter this space may also find SSYS an attractive acquisition candidate. At the peak of the 3D printing bubble in end-2013 and early 2014, SSYS was trading at EV of around $6 billion ($720 million now) and trailing EV/Sales of 12 times.