Investors have a love/hate relationship with Stratasys (NASDAQ: SSYS) stock. Along with rival 3D Systems, there are probably few better recent examples of stocks that have made some investors a lot of money quickly, and lost other investors -- at least on paper -- a great deal of money even more rapidly.
Those who bought Stratasys five-and-a-half years ago and hung on are still sitting on hefty gains of 233% -- twice the market's total return of 117%, as of March 26 -- despite the huge pullback that started as the calendar flipped to 2014. Meanwhile, those who bought about a year ago have watched their investment's value been cut nearly in half.
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Data by YCharts.
Let's look at what there is to love and hate about Stratasys' actual business:
3 things to love -- or at least like -- about Stratasys
1. It's one of the two co-first movers in the industryAlong with fellow industry leader 3D Systems, Stratasys is a first mover in the 3D printing industry. Oftentimes, but far from always, first movers enjoy a sustainable long-term competitive advantage.
Stratasys was founded by Scott Crump and his wife Lisa in 1989, three years after 3D Systems was launched. Crump served as the company's CEO until its 2012 merger with Objet, when Objet's CEO David Reis took over the reigns of the combined entity. Crump currently is Stratasys' chief technology officer and chairman of the board of directors.
2. Its strong organic revenue growth -- driven by its enterprise offeringIn the fourth quarter 2014, Stratasys' organic revenue growth -- growth in businesses owned for at least one year -- did slow somewhat both on a year-over-year basis and sequentially. However, 26% is still a robust number. Furthermore, if we exclude consumer-focused MakerBot -- which accounted for 12% of total revenue in Q4 -- Stratasys printed organic growth of 29%. So, there's clearly solid demand for its enterprise-focused offerings.
Chart by author. Data source: Stratasys' earnings reports.
By comparison, 3D Systems' organic growth rates for the four quarters last year were 28%, 10%, 12%, and 7%.
3. It has a tax advantage due to its foreign headquartersThis point seems to fly under the radar of many investors. After Minnesota-based Stratasys merged with Israel-based Objet in late 2012, the combined entity continued to maintain corporate locations in both countries, but deemed Israel its official corporate headquarters. Israel has a lower corporate income tax rate than the United States, so this merger helps Stratasys' bottom line.
3 things to hate -- or at least dislike -- about Stratasys:
1. Its decreasing profitabilityAlong with 3D Systems, Stratasys upped its growth game beginning in 2014. It's sacrificing short-term profits for increased spending aimed at capturing market share and fueling long-term growth.
This one is a mixed love/hate bag. We appreciate companies that are investing with an eye toward long-term growth, but don't like what that does to current profits.
Data by YCharts.
You can see the negative effects on earnings per share due to Stratasys turbocharging its growth strategy starting in 2014. The decline from late 2012 through the start of 2014 was due to the merger with Objet.
2. The cause of MakerBot's slow sales in the fourth quarterStratasys' management had been executing well (or seemingly so) through the third quarter of 2014. That came to a halt in the fourth quarter when MakerBot's year-over-year revenue growth slowed considerably to 7%. Furthermore, Stratasys took a $102 million goodwill impairment charge for the desktop 3D printer maker, which it acquired in mid-2013. Such a charge means that Stratasys overpaid for MakerBot.
Overpaying for an acquisition in a "hot" space is rather common, and it's too early to tell how the MakerBot acquisition will play out over the long term. So, it's premature to ding Stratasys too hard on this point. That's not the case, however, with MakerBot's underwhelming sales.
We can expect that most companies are going to experience occasional execution hiccups, especially those occupying fast-growing spaces that are rapidly scaling up. However, the primary reason behind MakerBot's sales problem is concerning: a rash of faulty extruders resulting in returns and lost sales. This issue suggests that Stratasys released its fifth-generation Replicator without doing a thorough quality-control job. Let's hope this proves to be an isolated incident.
3. It doesn't sell metal 3D printersThe metal 3D printing space is growing rapidly because 3D printing is increasingly moving beyond prototyping and into actual production applications.Stratasys doesn't sell printers that have metals capabilities, whereas 3D Systems does, thanks to its acquisition of Phenix Systems in mid-2013.
I don't believe this is a negative yet, as Stratasys' enterprise-focused offerings that can only print in a wide range of plastics have been selling well. However, I do believe the company will eventually need to offer systems that can print in metals if it wants to maintain its industry leadership position over the long term.
Positively, however, last year Stratasys acquired the 3D printing service bureaus of Solid Concepts and Harvest Technologies. Both these companies possess metal printing capabilities, so Stratasys is at least now getting a piece of this growing market.
Wrap-upThere are a fair number of things to both like and dislike about Stratasys. Investors, of course, need to keep their eyes on the MakerBot situation going forward. However, Stratasys generally has been executing well, so I continue to believe that the biggest threat to the company isn't internal, but external: Hewlett-Packard's expected entrance into the enterprise market in 2016 could potentially shake up the competitive landscape.
The article Investors' Love/Hate Relationship With Stratasys Stock originally appeared on Fool.com.
Beth McKenna has no position in any stocks mentioned. The Motley Fool recommends and 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.