Stratasys Ltd’s Weak Guidance Triggers Downgrades

Stratasys’ increased investment plans will pressure margins for the next few years

Stratasys Ltd's Weak Guidance Triggers Downgrades

Stratasys shares saw a big-time selloff after the company issued very weak guidance for this year that sent ripples throughout the 3D printing industry. 3D Systems shares plunged as well because of that guidance, although shares of both seem to have stabilized for now.

At least two firms downgraded Stratasys in the wake of the company’s latest earnings report and weak guidance, although at least one other sees more upside than downside as being likely.

Stifel downgrades Stratasys

In a research note dated Feb. 3, Stifel analysts Patrick Newton and Rob Richardson said they downgraded Stratasys from Buy to Hold and suspended their target price for the company. They still see good potential for the 3D printer manufacturer, but they’re less positive on it now because of the new investment plan.

In last night’s earnings report, Stratasys said this year it expects to spend 46% to 47% of its revenue on operating expenditures this year and probably in 2016 and 2017 as well. It’s believed increased competition, particularly from Hewlett-Packard, is the reason Stratasys feels the need to invest so much of its revenue into furthering its research and development efforts.

The Stifel team still sees “significant company-specific growth opportunities” for Stratasys, particularly in the Additive Manufacturing market. However, they cut their pro forma earnings per share growth estimates because of the company’s increased investments. They’re now projecting just 8.1% growth (down from 25.7%) this year and 19.5% growth (down from 26.3%) next year.

UBS downgrades Stratasys too

In their report also dated Feb. 3, UBS analysts Peter Milunovich and Peter Christiansen said they have also downgraded Stratasys from Buy to Neutral and slashed their price target by more than half. Their new price target for the 3D printer manufacturer is $55, down from their previous $125 per share price target.

The UBS team downgraded Stratasys for some of the same reasons the Stifel team did. They don’t like the margin pressure caused by the increased investment, and they don’t think the company’s shares will recover quickly.

They also pointed out that MakerBot’s revenue missed the plan by $13 million in the fourth quarter, adding that the brand sustained damage from shipments of defective extruders. It’s unclear right now just how bad that damage will end up being.

The UBS team does say, however, that one bit of good news is that Stratasys’ problems are “more growing pains than structural.” They like that management is “showing guts” by focusing on the long term at the expense of short term profits. They also think the company could make a good acquisition target now that its market capitalization is lower.

RBC Capital still rates Stratasys at Outperform

One firm that was less pessimistic about Stratasys’ report this week was RBC Capital Markets. Analysts Amit Daryanani and Mitch Steves reiterated their Outperform rating but slashed their price target for the company from $100 to $82 per share. They actually think the 3D printer manufacturer’s stock could move higher from where it is now because of the extensive price correction that occurred this week.

The RBC team also noted the MakerBot miss and points out that management expects just low-single digit growth in the segment compared to their estimate of 70% growth for the market as a whole.

Nonetheless, they think Stratasys management was actually being a bit conservative in their guidance for this year and see potential upside, particularly in the projections for MakerBot. Additionally, they think if there is any upside in revenue, the company will bring it through to the bottom line, possibly resulting in a better non-GAAP EBIT margin.