Stratasys Stock Upgraded on Analyst's Daydream

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Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

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Stratasys (NASDAQ: SSYS) sounds like a name that should belong to a space rocket company, but in fact, Stratasys is one of the biggest names in 3D printing (and the name we have been following here at The Motley Fool the longest).

The fact that Stratasys doesn't launch rockets, though, isn't keeping Stratasys stock from rocketing more than 8% today on the back of a big upgrade from the analysts at Susquehanna. Here are three things you need to know about why Stratasys stock is moving today.

1. It's not always about the earnings

This being earnings season, you might think that Susquehanna is impressed with some earnings news that Stratasys has just released -- but that's not the case at all. Although Susquehanna is upgrading Stratasys stock to "positive," and assigning a new $31 price target to the shares, Stratasys' Q3 2017 earnings results aren't due out until Nov. 14.

And even then, the news probably won't be all that great.

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According to Yahoo! Finance, analysts who follow Stratasys stock aren't looking for the company to grow revenue much more than 2% year over year. Profits won't impress investors much, either, with Stratasys projected (this time by S&P Global Market Intelligence) to extend its streak of 12 straight money-losing quarters, by losing another $0.17 per share in Q3.

For the year, Stratasys is expected to lose $0.78 per share by the way, and lose money next year -- and the year after that as well.

2. Help wanted: White knights apply within

So what does Susquehanna see in Stratasys that makes the stock a buy?

As explained in a write-up on StreetInsider.com (requires subscription) this morning, Susquehanna's bull thesis for Stratasys stock basically boils down to a hope that someone will buy Stratasys out. Although Stratasys isn't doing a good job of making it on its own, "SSYS's takeover potential should not be overlooked," says Susquehanna.

By buying Stratasys, another company could instantly grab a "market-leading position in an attractive secular trend, a broad product/IP portfolio, and a growing recurring revenue stream" in a 3D printing industry that is still quite young.

3. Forget profits -- look at these amazing losses!

And that's not all. Accenting the positive, Susquehanna points out that Stratasys' long history of losing vast amounts of money could be money in the bank for an acquirer. Stratasys has racked up nearly $1.6 billion in GAAP net losses over the past three years, you see, and if the company were ever to become profitable (or be acquired by a company that is profitable), then those $1.6 billion in "deferred tax assets" could be used to offset future profits, and lower Stratasys' (or an acquirer's) tax bill.

This prospect, says Susquehanna, "can potentially provide further value to potential acquirers."

The upshot for investors

But is that really all it boils down to for investors at this point? Stratasys is worth more dead (i.e., acquired) than alive and independent?

Maybe. I have to admit that with analysts forecasting no end to Stratasys' losses in future years, the company's prospects as an independent concern look bleak. But even if Stratasys is not acquired, I don't think that all is necessarily lost.

While GAAP losses continue to mount at Stratasys, free cash flow is finally flowing again for the company. Last year, for the first time in five years, Stratasys reported positive FCF from its business. Cash profits over the past 12 months amount to a respectable $24.4 million, which, weighed against the company's $820 million enterprise value, works out to an enterprise value-to-free-cash-flow ratio of about 34.

Surveying the field, most analysts think Stratasys is only capable of growing its earnings at about 21% annually over the next five years, which isn't enough to justify that valuation. But according to S&P Global, at least one analyst is on record thinking Stratasys could grow at 36%, which would justify the stock's valuation. Granted, that's just one analyst out of the 14 who follow the stock saying this -- but it's a start.

Bottom line: The bull thesis for Stratasys looks like a long shot, whether Stratasys remains an independent operator or gets bought out as Susquehanna hopes it will. But at least it's a shot.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Stratasys. The Motley Fool has a disclosure policy.