Stratasys, Ltd. (SSYS), 3-D Printing Facing Stock Wake Up Call

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 logo

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.



About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com