3D Printing Revolution (Stratasys), Apr. 2020

Company: STRATASYS Ltd. (NASDAQ: SSYS)

Sector: Technology-Hardware-3D  Printing

Price (Apr.22nd, 2020): US$16

Target price (12m): US$18.4

Expected Share Price Return: 15%

Investment Risk: Medium

Market Cap.: US$872m

Rationale for investment

  • 3D Printing takes on manufacturing following recent disruptions with faster prototyping and reduced logistics costs;
  • Pure play world leader in 3D printing with no debt;
  • SSYS is a potential acquisition target

Profile

For 30 years, Stratasys Ltd. manufactures three-dimensional printers. The Company builds three-dimensional models by depositing multiple layers of resin one on top of another based on data from three-dimensional computer aided design files.  

What is 3D printing ? 3D printing, also known as additive manufacturing, is the exact opposite of the traditional way of making objects. Instead of machining or “subtracting” material to form an object – much like how a sculptor cuts away clay – 3D printing adds layer upon layer of material to build an object. Product designers and engineers upload a digital (CAD) file to a 3D printer, which then prints a solid 3D object. Thermoplastics are the most frequently used materials, but the technology also includes photopolymers, epoxy resins, metals, and more. Cutting-edge bioinks, which use a mixture of human cells and gelatin, have also been leveraged to 3D print complex tissue models.

Who are the users ? The healthcare industry is using 3D printing technology to create medical items, such as prosthetics and organic material, to improve on custom designs for individual patients. Automotive industry is implementing 3D printed parts like shift knobs and cylinder heads in both passenger and racing cars, lowing costs and improving performance. The aerospace industry is producing lightweight 3D-printed table trays and complex 3D-printed parts for jet engines to improve quality and save on energy consumption.

Valuation

Company earnings and growth have been rather volatile over the last years. With $636m in flat sales and $39m EBITDA in 2019, company is currently trading at a 20x EV/EBITDA.  However, I believe higher assigned EV/EBITDA valuation multiples are justified for the 3D printing pure-plays owing to the scarcity of investing opportunities in this growth space, and their strategic value as potential acquisition targes if they are able to resume growth with new product-cycles. I believe 20x EV/EBITDA multiples are justified against normalized earnings. I estimate EBITDA of $50m in 2020/2021. I see SSYS price target of $18.4 based on 20x 2021 EBITDA estimate. Potential acquisitition should trigger a premium.

Investment Risks

  • Stratasys does not introduce any new technologies that strengthen its leadership position in the 3D printing market;
  • Cyclical downturn with industrial and medical capex falling;
  • Competitors enter the space and execute better;

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