What happens when a once hot investment category falls out of favor with the hedge fund community calls out a bubble? Look at the 3-D printing market and Stratasys, Ltd. (NASDAQ:SSYS) “positive” earnings report.
Stratasys’ Shares down 7% after delivering “positive” numbers
After reporting solid earnings growth on Friday, 3-D printing company Stratasys, Ltd. (NASDAQ:SSYS) were down nearly 7 percent in mid-afternoon trading. The real issue is: were the numbers positive by hedge fund metrics?
The 3-D printing market has been a darling of “innovation” that has been celebrated in GE television commercials and praised beyond count in various media reports. However, as ValueWalk had been reporting, the category came under attack from hedge fund investors who looked only at the numbers.
Hedge fund sharks such as Whitney Tilson and others had been piling into the short side of the stock, as reported in ValueWalk. As this was being reported stocks such as Stratasys were near $120 per share. The activist hedge fund primary argument was that 3-D printing is impractical and cost inefficient, with little chance for revenue growth to compensate for the stratospheric valuations.
Stratasys, Ltd. (NASDAQ:SSYS) is just the most recent example.
Profit under 3% of sales in a competitive market
Stratasys, Ltd. (NASDAQ:SSYS) reported revenue of $150.9 million in first quarter revenue, which is at the heart of the bear case. While the gross sales were up 55% from the same period a year ago, the profitability still has a long way to go to justify the stock price on an old school value basis. Net income came in at $4.1 million, under 3% of total revenue. And this is up from a loss of $15.5 million a year ago.
While earnings per share were 8 cents, easily beating Wall Street analysts’ negative 7 cent consensus estimate, that “beat the street estimate” game is too simple for activist hedge fund managers to play. At a fundamental basis they say the net income needs to climb much higher to justify the stock price – a climb that even selling 8,802 3-D printing systems during the quarter can’t solve unless the profitability comes with the sale.
Brokerage bulls exist
Bulls still exist, primarily in the bank and brokerage community. Citi Analyst Kenneth Wong has a $135 price target on Stratasys, Ltd. (NASDAQ:SSYS), but notes that the “market demand” is a risk to his valuation.” The translation is that old school metrics are finally catching up with the high flyer, and if this happens my lofty estimate might be in question.