With Stratasys' strong second-quarter earnings results now in the rear-view mirror, let's address this question: Is this a good time to buy Stratasys' stock?
Valuation has generally been shown to matter -- at least over the long-term. Granted, absolute valuations for high-growth stocks, such as 3-D printing companies, matter considerably less than valuations for average and slower growers, in my opinion. However, it's wise for investors to pay some attention to a company's relative valuation -- that is, relative to its closest peers and competitors.
So, let's look at how Stratasys stacks up against its main competitor 3D Systems ( DDD ) and some other 3-D printing companies on several common valuation measures. 3D Systems is, by far, the company most similar to Stratasys. These two companies were the industry's first-movers and are considerably larger than the others. Additionally, they're both quite diversified, as they have 3-D printer offerings for the consumer, commercial, and industrial markets. They both also offer a wide range of print materials (though Stratasys' printers don't have metals capabilities), and have service segments that provide 3-D printing on-demand for customers. By contrast, the other companies are more specialized in terms of target markets and print materials. The two much smaller industrial-focused players, ExOne and Arcam, are included to provide additional context.
Source: Yahoo! Finance; data as of Aug. 14.
As the chart shows, the two leading companies have somewhat similar valuations. Their price-to-sales ratios are essentially the same, while 3D Systems sports higher forward price-to-earnings, or P/E, and five-year PEG ratios. (The PEG is the P/E divided by future growth estimates; in this case, for the five-year period.)
Granted, the two big players have lower P/S and forward P/Es than the two smaller companies. However, don't take that to mean they're cheap. Very small companies usually have higher valuations than larger ones because it's easier for them to grow faster on a percentage basis since they're starting with smaller base numbers. To provide some context, the average P/S and forward P/E for stocks in the S&P 500 are 1.7 and about 15.7, respectively. So, all the 3-D printing companies are very pricey. Of course, the average stock in the market is growing at a snail's pace compared to 3D Systems and Stratasys.
That brings us to growth. The PEG is a better metric, in my opinion, than the P/S and P/E ratios because it takes growth into account. That said, the five-year PEGs are based on analysts' estimates for five years out, so I'd not put too much stock in them. It's difficult to accurately forecast how fast such a disruptive technology as 3-D printing will grow, and it's not possible to know what the competitive landscape will look like in five years. As for ExOne's negative PEG , that means analysts don't expect the company to be profitable in five years.
Investors shouldn't look at valuation measures such as the P/E and P/S in a vacuum, but along with current and future projected growth. The following chart shows analysts' estimates for revenue and earnings growth for 2014 and 2015. (I left Arcam out, as there are no forward estimates, and I left ExOne out as the company isn't projected to be profitable this year, next year, or, as noted above, in five years.)
2014 Est. Revenue Growth
2015 Est. Revenue Growth
2014 Est. EPS Growth
2015 Est. EPS Growth
Source: Yahoo! Finance; EPS estimates are non-GAAP.
Stratasys is projected to post powerful revenue growth in 2014. Growth is being driven by robust organic growth - 33% in the first quarter and 35% in the second quarter - as well as from the strong contribution from MakerBot, the desktop 3-D printing company it acquired last July. Analysts expect the two leading 3-D printing companies to have nearly identical revenue growth in 2015.
Stratasys' non-GAAP or adjusted EPS growth is forecasted to be stronger than 3D Systems' this year. However, this isn't an apples-to-apples comparison, as Stratasys' 2013 comparison bar is low because of its 2012 megamerger with Objet. Stratasys' earnings growth is getting a boost this year because the Objet merger is now essentially digested. Both companies have upped their growth strategies in 2014, and are sacrificing short-term profits for spending intended to fuel long-term growth. So, both companies earnings, especially from a GAAP standpoint, are under pressure.
Conversely, 3D Systems' earnings growth is expected to top that of Stratasys in 2015. However, many factors could change these estimates, as both companies are in acquisition modes. Additionally, 3D Systems' high-speed, continuous 3-D printing platform, which it's producing for its teaming with Google on Project Ara, is slated to be up and running and churning out customizable, modular cell phones in 2015. Also, Stratasys has been executing better than 3D Systems in 2014, and beating analysts' estimates. If this continues, the consensus' estimates for its 2014 and 2015 growth could prove too conservative.
On an absolute basis, Stratasys is an expensive stock, though relative to 3D Systems, it seems "fairly" priced. While the stock is pricey, the current and projected growth dynamics of 3-D printing are so compelling that investors with a long-term horizon who believe that Stratasys will remain a leader in this space could be amply rewarded. While nothing is a sure thing, Stratasys' management has been executing very well, and there seems to be no reason to believe that won't continue.
As for the growth dynamics of 3-D printing , according to the 2014 Wohlers Report, revenue for the industry grew by 35% to approximately $3 billion in 2013. Wohlers projects that the market will explode to $10.8 billion by 2021. Morgan Stanley is even more optimistic, as its bull scenario predicts the 3-D printing market to be worth $21 billion by 2020.
I've long believed that the best way to invest in 3-D printing is to buy more than one stock. In a fast-evolving technology space, it's very difficult to predict which of the existing players, if any, will emerge the winner(s) over the long term. So, it's best to cover as many bases as you can. Granted, Stratasys looks like the better buy, as it's been executing better than 3D Systems in 2014. However, 3D Systems has a couple aces up its sleeve that could power the company's long-term performance -- namely, its continuous, high-speed 3-D printing platform and its metal printer offerings.
In short, Stratasys seems the steadier player -- and hitting double after double will often win the game -- while 3D Systems is the swing-for-the-fences player, probably likely to strike out more often, but perhaps also more likely to hit the home run. If I had to pick just one company, though, to invest in now it would be Stratasys. And, yes, that's the popular opinion now, but I have favored Stratasys as far back as last fall, when that opinion was decidedly in the minority.
A final caveat: 3-D printing stocks have high valuations and betas -- which means they have high stock price volatility. Thus, they're suitable only for those with higher risk tolerances who have long-term investing horizons. Folks who can't stomach -- or afford -- considerable losses should not be invested in these stocks.
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This article is one of a five-part series. While all articles are stand-alone, read together they offer a more thorough examination of Stratasys as an investment. The four others are: a look at the company's Q2 earnings report ; don't-miss quotes from the conference call ; 3 Reasons Stratasys' Stock Could Rise; and 3 Reasons Stratasys' Stock Could Fall.
The article Is It Time to Buy Stratasys' Stock? originally appeared on Fool.com.
Beth McKenna has no position in any stocks mentioned. The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool owns shares of 3D Systems and Stratasys. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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