Stratasys’ 3-D Printing Revolution Gets Jammed

Fans of gadgets rejoiced when 3-D printing was first unveiled, but shares in the Israeli-U.S. firm have plummeted 85% from their 2013 peak, leaving not even a paper profit.

Many people assumed that the 3-D printer industry would herald a new technological revolution, but it’s got stuck in recent years. And there is no better – or worse – example of the industry’s plight than Stratasys, the U.S. company that merged with Objet of Israel in 2012 and has since been regarded as an Israeli firm.

Stratasys has a workforce of some 2,500, mostly in Israel and the United States. In 2013, it was trading at a market value of $6.5 billion, after its stock price went from $18 to $135 in the space of three years. But since then the retreat has been complete and it has been back trading at around $18, reflecting a market value of $950 million.

So what happened? Understanding what happened in the 3-D printing industry as a whole – particularly at Stratasys and its major competitor, U.S. firm 3D Systems – requires us to look back at the heady days of hype in which Stratasys’ stock price skyrocketed.

People who were investing in the company really believed, in their innocence, that the revolution was afoot and that many items, from kitchenware to toys, would soon be produced on 3-D printers that would be making their way into every household.

The revolution may have been in its infancy, but Stratasys shares jumped 300% in two years. Shares of 3D Systems shot up to 10 times their earlier value, to a market capitalization of $10 billion.

The market values for the two companies were bolstered by impressive business results, with revenues at Stratasys going from $484 million in 2013 to $750 million in 2014. At its peak (the beginning of 2014), Stratasys’ market capitalization was 12 times its sales, reflecting expectations of 40% to 50% growth in the coming years.

But that’s when things started to sour. One of the dangers facing investors in a company with such a high market cap-revenue ratio is a lower rate of growth, which cools expectations. And if sales actually begin to fall, it can spell financial disaster.

That realization began to sink in for investors in the second half of 2014, and the stocks of both market leaders began to tank. The real hit, however, came in 2015 when Stratasys’ revenues dipped by 8% to $696 million. This was combined with an accounting loss of a massive $1.3 billion after the company deducted $1 billion in goodwill over two acquisitions: the purchases of Objet and home printer company MakerBot.

At 3D Systems, sales in 2015 stagnated at around $660 million and its share price plunged 85%. The days of high growth had screeched to a halt more quickly than expected.

But executives at the 3-D printing companies didn’t rush to share the details of the crisis with investors. They pinned the blame on the macroeconomic situation, which they said was leading customers not to invest in equipment. They didn’t want to admit that the coming revolution never actually came. Purchasers of 3-D printers simply weren’t finding them of financial value, which in turn deterred potential buyers.

Stratasys’ latest financial results, for the third quarter – released last week – were worse than expected. The company reported $157 million in revenues (compared to a projected $174 million) and no net profit. For 2016, the company is expected to report $670 million in revenues, down about 5%.

The company’s share price responded with a 12% drop, putting it close to its low over the past five years.

The case of Stratasys is particularly interesting as an example of a wider phenomenon when it comes to the high-tech sector, which involves exaggerated enthusiasm around a “hot” company that grabs the imagination.

The initial excitement usually comes from gadget fans, who in turn get investors excited. A recent example is GoPro, the maker of wearable action cameras. Shares in the company soared when it went public in June, only to come crashing down again, even falling below the IPO price last week. And then there’s Twitter, shares of which went from $41 to $69 in two weeks. Now, though, they are trading around $19.

Over-exuberance by investors should be ignored, because it’s not supported by the numbers or long-term analysis of the market. It usually doesn’t accord sufficient weight to the risks or the prospect that a new market may require time to take off. And even after their share prices take a tumble, these companies could still be overpriced. That may still be the case with Stratasys. Sales of 3-D printers may grow, or possibly Stratasys will be left behind as sales go to competitors.

Investors who think Stratasys’ current trading level may present an opportunity should consider the following factors:

1. What are the printers used for?

There are major uncertainties hovering over the 3-D printer market. The printers are being used mainly to make prototypes, or for products that are made in small quantities and for which it is not practical to create an entire production line. Although 3-D printer firms want their products to be used for mass production, too, they are not there yet.

2. What is the business model?

Stratasys’ revenues come from printer sales and, after that, from production materials such as plastic and nylon (the equivalent of ink in conventional printers), as well as from support and maintenance services. A decline in printer sales, therefore, will consequently result in a revenue decline from the subsequent services. In the third quarter, Stratasys reported a 20% drop in sale of new 3-D printers compared to the same quarter in 2015, while its revenues from production materials and support actually rose.

The market as a whole – including printer sales, materials and services – grew by 26% in 2015. However, that never happened at Stratasys, which was stagnant. The company’s chief financial officer, Erez Simha, told analysts that the company’s lowered outlook is not a result of a loss of market share, but rather market conditions.

A JPMorgan report stated that 3-D printer sales were $5 billion in 2015, and are expected to grow to $8.8 billion next year and $25 billion by 2025. And analysts from the Stifel investment bank, writing about Stratasys last week, said they believe the firm has a potential for growth in the long term, and that the market will return to growth. But they still don’t believe there will be an improvement in the short term. They wrote that if Stratasys wants to grow, it needs to invest in additional software, expand its material supplies and develop quicker printers.

In the interim, Stratasys is investing a lot in trying to find new customers in industrial fields – such as the automotive industry – and to show them the advantages of using 3-D printers. But this will take time.

3. Who will be the market leader?

Veteran printer manufacturer HP was a latecomer to the 3-D printer field. But about six months ago, it unveiled a competing printer and announced it was aiming over the long term at the mass production market, where it says the big money will be. The entry into the market of such a large company, with such vast resources, could pose a major threat to Stratasys, as well as to 3D Systems. However, it could educate the market, too.

4. Which part of the market to focus on?

In June 2013, Stratasys bought U.S.-based firm MakerBot for $400 million. MakerBot manufactures 3-D printers for the home. Stratasys was hoping to get into every home, school and neighborhood community center, thinking people could do it themselves using programs purchased on the internet or from their own original plans.

MakerBot products have made up a substantial share of the 160,000 printers Stratasys sold since it was founded in 1989, but something went wrong along the way. A combination of problems with MakerBot’s printers and growing market competition led to a situation in which MakerBot now contributes less than 10% of Stratasys’ revenues. What happened in part is that, last year alone, 350 new 3-D printer companies entered the market, some of which make printers for industrial use but some also make printers that compete with MakerBot’s.

Because products printed on 3-D printers are not used as precision parts – on cars or airplanes, for example – many customers can make do with lower quality and prefer to buy printers that are much cheaper than MakerBot’s (whose cost can run as high as $2,500). Stratasys is hoping MakerBot’s newest line of printers will pull it out of its slump and restore growth.

5. Who is running the company?

Stratasys replaced its CEO in June. David Reis retired after seven years and the firm is now run by Ilan Levin, who started out at Objet. The company did not explain the move, but it has undergone a tumultuous couple of years both from a business and legal standpoint. A lawsuit against the company for allegedly misleading investors over MakerBot’s operations was dismissed, but the U.S. Securities and Exchange Commission also investigated why the company wrote off goodwill, leading to a huge loss in 2015.

In his last year, Reis took a number of steps to reorganize the company, merging operations and cutting staff, as well as outsourcing the production of home printers.

6. Who might buy whom?

Stratasys is the product of a number of company mergers, and it’s not the only one. The sharp decline in the value of the companies in the field may make them attractive targets for large corporations. In the past, there were thoughts that HP could acquire Stratasys or 3D Systems, but at this point it appears that it wishes to develop a 3-D printer of its own.

A merger of Stratasys and 3D Systems, which at one time would have seemed inconceivable, might also come in for some consideration. In March, Stratasys CFO Simha told JPMorgan that such a merger could actually benefit both companies, but added he didn’t think it was a practical possibility.