Strategic Valuation of Stratasys Inc

Stratasys Inc. (ticker: SYSS) engages in the manufacture of three-dimensional (3D) printing
machines, rapid prototyping (RP) systems, and direct digital manufacturing (DDM) machines
across most of the developed countries. These systems enable engineers and designers to create
models, prototypes, and even actual working parts directly from CAD designs. Major markets
include design laboratories, manufacturing firms, architects, engineering schools in a list limited
only by the imagination of the user. Stratasys main competitors include 3D Systems, Objet, and
Z Corp. Analysis of the success factors shows that the company relies on the emerging and
rapidly growing market for three-dimensional printing that hold potential to generate the next
technological revolution in manufacturing processes.
The Strengths-Weaknesses-Opportunities-Threats (SWOT) analysis for Stratasys reveals the
following factors:
Strengths
-

Major strength is the reputation for innovation , reliability, and credibility that gives its a
lead over existing players and potential new entrants

Stratasys has invested hugely in research and development and continues to do so to add
to its portfolio of products and services

Zero borrowings place the company in an excellent position to raise debt to finance rapid
expansion in keeping with market demand

Large portfolio of existing satisfied customers that generates repeat demand and demand
for consumables and spares provides the company with a minimum assured sales level.

Weaknesses

Three-dimensional printers are very expensive thereby restricting market opportunities

The limited number of materials that 3D printers can presently use to make models and
parts (presently nine) further restricts market size

Stratasys has a limited market reach in its present market coverage that includes North
America, Europe, and Australia. However, it has made a small entry into emerging
markets such as India and China recently

Low level of intellectual property rights on technology make it vulnerable to competition

Opportunities
-

The main opportunity lies in exploiting the emerging markets in developing countries that
include China, Brazil, India, Russia, and South Africa. Major market opportunities also
exist in the rapidly developing economies such as Taiwan, Malaysia, and Turkey etc.

Larger volumes will lead to lower cost and help increase market penetration and market
size

Large opportunity exists in manufacture of parts with more materials for the human
body for example, a bone transplant that doctors can engineer to meet the exact size and
shape for the individual patient.

Threats
-

Existing competition and rapid entry of new players in the market will challenge the
company on market share. One can see a price war emerging in the foreseeable future.

Rapid diversification and expansion could place major pressure on the companys
resources both human and financial.

The company appears to have very few patents on technology. Cheap products from
China and other developing countries both in the equipment and consumables markets
will pose a major threat.

Crowd sourcing where people across countries and different demographics come together
to create open-source software and product ideas could emerge as a potential threat.

Porters Five Force Analysis

Stratasys is the current market leader in the rapidly evolving market with all players expanding
sales rapidly. Cost of printers has declined rapidly with simple desktop printers being offered for
less than $1,0001 compared to the massive price tags (several hundred thousand dollars) on the
first 3D printers on the market. Analysis of its business environment using Porter five-force
dimensions reveal the following picture:
-

Threat of New Entrants: appears high but rapidly declining in force as the market
reaches saturation

Bargaining Power of Buyers: is extremely high because the potential buyer has a vast
market offering to choose from

Threat of Substitutes: is low because no alternative product or technology appears on the

horizon to provide a viable alternative to 3D printing

Bargaining Power of Suppliers: appears moderate to strong because the company does
not have in-house manufacturing facilities for the hardware and consumables but relies
on custom manufacture by outside vendors

Rivalry among Competitors: is intense as many competitors vie for the customer dollar

1 http://www.hongkiat.com/blog/affordable-3d-printer/

The analysis reveals a shifting focus on price leadership as the initial sunk costs and total
ownership costs are declining rapidly. Technology differentiation appears to be declining but the
industry will survive and grow as the only substitute is to revert to traditional prototyping that is
expensive and time consuming. The total market for 3D printers was approximately $412million
in 2013 representing a 43% year-on-year growth and expected to grow by 62% in 2014 to reach
$669million in 2014. This is a part of the total 3D printing related market, which includes
printers, services, and supplies that exceeded $2billion in 2012 and expected to grow to
$17billion by 2020. With the potential entry of the printing giant HP into the fray, equations will
change further2.
The emerging form of the market is the typical razor and blade business model where initial
installations appear slowing down while the market for parts, service, and consumables drives
the overall growth (See Figure-1).

2 http://www.forbes.com/sites/greatspeculations/2014/03/28/why-is-hp-entering-the-3d-printing-

industry/

Figure-1: Market Mix and Growth

(Source: Business Insider Website3 accessed April 20, 2014)
Financial Analysis
Key operational performance and financial position indicators for both companies appear in
Table-1 and Table-2 below:

Indicator
Revenue
Growth
Annual Growth
Gross Margin
Operating Margin
Net Margin
Net Income
EPS

2008
$124,49
5

2009
$98,356

2010
$117,09
9

2011
$155,89
4

2012
$215,24
4

10.9%

-21.0%

19.1%

33.1%

38.1%

11%
11%
2%
-5%
0.65

-30%
-72%
-70%
-70%
0.2

21%
131%
124%
128%
0.44

47%
115%
127%
120%
0.95

33%
-41%
-41%
-59%
0.36

$230,42
3

$353,63
3

CAGR
13.91
%

38.07%

12.98
%
-1.51%
-1.89%
-9.93%

38.07%
40.97%
40.96%
58.83%

Key Metrics -- 3D Systems

Revenue
Growth
Annual Growth
Gross Margin
Operating Margin
Net Margin
Net Income
EPS

53.5%
66.19%
73.55%
33.39%
19.36%
0.71

0.70

Table -1: Key Operational Metric Growth Stratasys and 3D Systems

(Source: Company published data and own calculations)
Indicator
Liquidity
- Current Ratio
Activity

Stratasys
2010
3.24

2011
5.09

3D Systems
2012
5.96

2012
3.82

3 http://www.businessinsider.in/CREDIT-SUISSE-3D-Printing-Is-Going-To-Be-Way-Bigger-

Than-What-The-3D-Printing-Companies-Are-Saying/articleshow/22670821.cms

- Inventory Turnover
- Average Coll. Period
- Fixed Asset Turnover
Total Asset Turnover
Debt
Debt/Equity Ratio
Profitability
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Return on Inventory
Return on Equity
Operating ROI

3.41
62.50
3.92
0.66

3.23
61.42
3.93
0.70

1.55
148.57
3.47
0.12

4.12
82.44
10.29
0.52

7.59%

5.33%

1.21%

23.51%

47.90%
11.50%
8.00%
5.25%
6.15%
7.55%

52.86%
18.61%
13.23%
9.30%
11.25%
13.08%

51.06%
7.95%
3.94%
0.49%
0.54%
0.99%

51.24%
17.13%
11.27%
5.88%
8.30%
8.94%

Table -2: Key Operational Metrics Stratasys and 3D Systems

(Source: Company published data and own calculations)
The numbers in tables 1 and 2 above indicate the position and performance of two companies at
the takeoff stage of growth. It is important to read these numbers in the context of some relevant
observations. Primarily, dependence on the US and European countries markets to generate
revenue and profitability affected both companies almost equally when the economies of these
countries entered a recession in late 2008. However, it is interesting to see that while stocks of
other companies (as indicated by the NYSE Composite Index) and information technology based
companies (as indicated by the S&P 500 Information Technology Index) continued to struggle,
the stocks of these two companies skyrocketed. Figure-2 below shows the value of $100 invested
in any of the four options as on December 31, 2014.

Value of $100 invested in 2007

$700
$600
$500

3D Systems

$400

NYSE Composite
Index

$300

S&P Infotech Index

$200

Stratasys

$100
$0
2007 2008 2009 2010 2011 2012
Year

Figure-2: Stock Performance

(Source: Yahoo Finance and own calculations)
The second observation is that the performance of Stratasys appears to have suffered in the year
2012 in comparison to 2011. The primary reason for this is the sudden increase in the Sales and
General Administration expense from $39million to $73million. The company says this is
because of amortization of trade name and customer relations (amount not specified) in an
obvious reference to the premium paid on acquisition of OBJET. In addition, the company
charged a sum of $615,000 expenses paid for the acquisition to expenses for the year. This
treatment of acquisition cost and amortization of acquisition cost to revenue raises doubts about
the correctness of the accounting entries, which must otherwise reflect in the capital cost and
depreciation schedule.
Given the situation explained above, it is not surprising that results for 2012 appear toned down
despite an increase in sales from $155million to $215million and increase in gross profit by
33.38%.

The cyclic performance of the stocks of both companies compared here perhaps reflect
customers delaying purchase decisions in uncertain times combined with increased competition
leading to lower profit margin. As the economy picks up and foreign markets open up to entry,
we can forecast a strong growth in stock value for the next two years followed by a small slump
in performance. The fact that the company has not diluted total number of shares and has not
sought to obtain credit for organic or inorganic expansion are further positives that must restore
investor confidence.
Historical Trends
Both Stratasys and 3D Systems are small market capitalization companies engaged in a field that
is evolving very fast. Both companies have been in existence for many years but it is only in
2007 that the market began to take off. However, the economic slump followed immediately and
affected their performance substantially. One would normally expect these companies to record a
growth of 25-35% but the CAGR numbers show relatively anemic performance because of the
slowdown over which they had no control. In addition, the massive reported fall in operational
efficiencies for reasons of capital expenses being charged to revenue makes it difficult to use the
numbers to make any forecast of operations and future profitability.
Analysis shows that SYSS is a financially sounder and stable in its performance compared to 3D
Systems if we look at the EPS for 2011. In 2012, if we add back the amortization and acquisition
expense, the EPS would probably be better than that and much higher than the 0.71$ per share
recorded by 3D Systems.

SYSS invested 9.12 and 9.13% of its total revenue on research and development compared to
6.22 and 6.56% invested by DDD in 2011 and 2012 respectively. In dollar amounts the spend on
R&D by the two is almost equal. In addition, SYSS has concentrated on acquisitions as an
important path to growth thus far. We can assume that the effect of these investments and
acquisitions will begin to influence the bottom line in the near future.
Valuation
The discounted future cash flows (DCF) or the present value of projected cash flows appears
difficult given the circumstances discussed above making it necessary to adopt a different
approach. For this, the EBITDA Multiple approach appears as a better solution because of its
simplicity and because it helps eliminate the tedious (and in this case the difficult) and inexact
task of estimating future cash flows. Moyer (2004) discussed this method in context of valuation
of distressed company stocks but this can serve our purpose very well in the present situation.
This method involves multiplication of the EBITDA with a multiple that mathematically are very
close substitutes for the actual DCF process.
Two calculations are made to arrive at a range within which we may expect the enterprise value
and therefore the share price to fluctuate over the next year. The aggressive forecast assumes an
8% annual growth rate over the next twenty five years, and a discount rate (market return
expectations) of 12%. The pessimistic forecast assumes a 2% growth and a discount rate of 15%.
The multiples for these values are 14.9 and 8.3 respectively.
The EBITDA calculated for 2012 was $53.218million using an extrapolation of historical SG&A
expenses instead of that declared by SYSS. The enterprise value calculated using the multiple

method ranges between $441.71million and $792.94million and equivalent per share market
price of $11.51 and $20.66 respectively. The opening share price on January 2, 2013 was $83.48
to end the year at $134.70. The massive difference between projected share price and actual
behavior on the market show the impact of market sentiment as the share had shown a beta of
2.17 and forward P/E ratio of 35.76 (Yahoo Finance4)
Strategy Recommendations
Firms in any business must pursue a clearly identified strategy that aims to use three strategic
directions proposed by Michael Porter (1980) instead of falling into the hole in the middle. The
strategies identified are cost leadership, differentiating of products and services, and market
focus (segmentation). In the case of Stratasys, product differentiation appears as the best
alternative because potential customers are not very price sensitive and have specific needs and
Stratasys has the difficult to copy resources and capabilities to meet these needs. However,
emerging competition requires a combination with a best cost strategy through a sharp focus on
cost reduction across the entire supply chain. A hybrid strategy that combines differentiation with
best cost leadership has greater chances of sustained success compared to a single thrust strategy
(Miller, 1992). Focus or segmentation strategy appears as a given because 3D printers do not
compete in a mass market but only in a specific customer driven market. Some specific strategy
directions could be:
Continued innovation would create specialized knowledge and provide an opportunity to create
product differentiation as long as the knowledge remains unique (Fruhan, 1979)

4 http://finance.yahoo.com/q?s=SSYS

Capital equipment market for 3D printers must eventually go the same way as the existing
printers with emphasis shifting to supply of consumables and spares. The company must
strategize to be in a position to exploit this market and devote more R&D spend to increasing the
possibility for use of more materials for printing and these need to include organic biodegradable
materials.
Stratasys must analyze its existing business to identify areas of core competence present and
future competitors will find difficult to replicate and focus on building on these competencies.
This will permit the company to establish niche markets for itself well protected from
competitive pressure.
The company must enter into long-term agreements where possible and examine the possibility
of lease-purchase agreements with customers that encourage and bind the customers to deploy
3D printing in more manufacturing and design processes and continue to buy consumables and
spares from Stratasys.

References
Fruhan, W.E. Jr. (1979): "The NPV Model of StrategyThe Shareholder Value Model," in
Financial Strategy: Studies in the Creation, Transfer, and Destruction of Shareholder
Value, Richard D. Irwin, Homewood, IL
Miller, D. (1992): "The generic strategy trap", The Journal of Business Strategy, Vol. 13(1): 3741
Moyer, S.G. (2004): Distressed Debt Analysis Strategies for speculative investors, J. Ross
Publishing, Boca Raton, FL

Porter, M.E. (1980): "Competitive Strategy: Techniques for analyzing industries and
competitors" The Free Press, New York