Stratasys, Ltd. (NASDAQ:SSYS) shares soared 1.94% to $123.10 after Morgan Stanley issued a bullish report on the stock. Morgan Stanley analysts initiated coverage of Stratasys with an Overweight rating and $135 price objective. The research firm also began covering 3D Systems Corporation (NYSE:DDD) with an Equal weight rating. Morgan Stanley analysts Scott Schmitz and Katy Huberty expect the 3D printing market to grow at 24% annual rate through 2020.

Stratasys has 3x larger industrial installed base

Analysts said 3D Systems’ broad product portfolio, ramping product cycles, expanding distribution and high-end exposure should help the company. But they believe the company will need massive investments to support its aggressive acquisition strategy and its product portfolio. The company’s current OpEx is about ten points below that of Stratasys. The Rock Hill-based company’s margins are expected to recover in 2014 and 2015.

Morgan Stanley points out three reasons Stratasys is a better investment than its biggest rival in the market. One: it has three times larger industrial installed base, which drive high margin materials revenue. Materials have a gross margin of more than 70% compared to about 40% for printers. Currently, materials make up just 25% of the total 3D printing revenue. That’s because low penetration rate is driving the printer growth. But Morgan Stanley expects materials growth to increase as a percentage of total revenue over time.

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Stratasys’ organic growth more sustainable

Two: Stratasys is investing heavily in product development and marketing efforts. So, the company has strategically lowered its operating margin expectations from 20%-25% to 18%-23%. Stratasys recently acquired lower margin service bureaus such as Solid Concepts that were also factored in the lower margin guidance. On the flip side, 3D Systems invests about 30% of its revenue on OpEx compared to about 40% for Stratasys. With its aggressive sales & marketing investments, Stratasys’ organic growth rate is more sustainable. 3D Systems needs to increase the OpEx to drive organic growth, which shrank to just 10% in the latest quarter.

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Three: Stratasys looks cheaper than 3D Systems. Stratasys has a P/E (FY2015) of 38.2x, about nine turns lower than 46.8x for 3D Systems. What’s more, Stratasys is growing its EPS about 50% faster than its rival. It offers a lucrative opportunity of buy Stratasys on cheap.

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