Stratasys Stock: Overlooked Strategic Options (NASDAQ:SSYS)

Stratasys’ (NASDAQ:SSYS) financial performance in recent quarters has been reasonable given the difficult demand environment. Investors continue to shun the stock though, with the share price down over 30% year-to-date.

I previously suggested that Stratasys’ ongoing losses would put downward pressure on the share price. This continues to be the case, with a soft demand environment making it difficult for the company to generate sufficient revenue to achieve breakeven. Despite this, Stratasys still has a reasonably healthy balance sheet and has managed to significantly reduce its cash burn in recent quarters, positioning the company to weather the current downturn.

Stratasys also still has an acquisition offer on the table that should probably be providing more of an anchor on the share price. Nano Dimension (NNDM) offered to acquire all of Stratasys’ outstanding shares in late 2023 for 16.5 USD per share in cash. While Stratasys has been fairly antagonistic towards Nano Dimension’s advances in the past, this offer still exists and the companies appear to be in discussions.

Market Conditions

Customer CapEx remains constrained as a result of the tight financing environment, which is an ongoing issue for Stratasys’ capital sales. Challenging conditions are expected to persist throughout 2024, causing continued delays in purchases and longer sales cycles. Outside of divestitures, Stratasys’ revenue has been fairly flat, with the company believing that it is gaining market share. There was reportedly a modest improvement in Stratasys’ sales cycle in Q1 though, and the company’s engagements with customers have also been solid.

Stratasys is not the only additive manufacturing company facing losses and declining revenue, suggesting that its current struggles are primarily the result of macro conditions and not any company specific issue.

Stratasys Business Updates

Stratasys continues to expand its material and printer offerings, with a focus on mass production use cases. The F3300 was launched towards the end of 2023 and offers up to twice the throughput of standard FDM systems with significantly lower production costs. It targets the high-end, large part FDM market. The F3300 is reportedly driving expansion of Stratasys’ sales funnel and initial orders have surpassed the company’s expectations. More significant F3300 revenue is only expected in the second half of the year though. Early customers include Toyota, BAE Systems, Sikorsky and Nissan.

Stratasys also recently launched the H350 version 1.5, which has improved sensors and remote service capabilities. Along with this, Stratasys introduced SAF HighDef Printing capabilities, allowing customers to create more intricate parts. This will be delivered as part of a firmware update and will be backwards compatible with previous H350 models.

Stratasys has also introduced new materials for FDM, which will open up applications in industries like aerospace and medical. VICTREX AM 200 is a PEEK-based polymer that is temperature, corrosion, and chemical resistant, and has strong mechanical properties.

Stratasys also introduced Parts on Demand by GrabCAD, which integrates the company’s software platform with Stratasys Direct, allowing customers to access Stratasys Direct’s 3D printers. Stratasys is trying to create a connected software ecosystem and believes that the integration of hardware and software provides it with an advantage as it has access to logs which provide insight into customer needs. Success in this area would go a long towards creating differentiation and improving Stratasys’ ability to generate profitable growth.

Financial Analysis

Stratasys generated 144 million USD revenue in Q1, a decline of 3.5% YoY. Excluding non-core divestitures, revenue was relatively flat. First quarter product revenue was 99 million USD, down approximately 2% YoY. Given heavy utilization of previously purchased systems, Stratasys anticipates these systems eventually being replaced by higher performance systems, leading to a rebound in product revenue. Within product revenue, system revenue was down roughly 19% YoY, while consumables revenue increased approximately 10%. It should be noted that Covestro was acquired in April 2023 and is contributing 4-5 million USD per quarter. Absent this, consumables revenue was fairly flat. Service revenue was 45 million USD in Q1, down around 7% YoY. Excluding divestitures, service revenue was up 1.8%.

Stratasys expects 630-645 million USD revenue in 2024, with sequential quarterly revenue growth and stronger growth in the second half of the year. This would represent approximately 1.6% growth at the midpoint. Given Stratasys’ soft Q1 results and ongoing macro weakness, I am skeptical that this will be achieved.

Stratasys’ gross profit margins have been fairly stable in recent quarters, supported by strong consumables revenue and higher Stratasys Direct margins. Pandemic related inflationary pressures are also no longer an issue.

Stratasys’ operating expenses totaled 88.4 million USD in the first quarter, up roughly 7% YoY. The increase was attributed to recent acquisitions and expenses associated with the company’s strategic review process. As a result, the company’s profitability continues to slide. While this is obviously a negative, Stratasys’ losses are manageable, and its cash flows are improving. Stratasys generated 7 million USD cash from operations and was free cash flow positive in Q1. The company expects to be cash flow positive for the full year.

Conclusion

Stratasys’ declining revenue and ongoing losses continue to weigh on the stock. While this is negative, it is largely the result of a soft demand environment. Outside of divestitures, Stratasys’ revenue is still fairly solid, and the company is reducing its cash burn. Stratasys also still has around 160 million USD cash and cash equivalents on its balance sheet, providing it with flexibility.

I am not overly bullish on the prospects of most additive manufacturing companies, but the market is likely too pessimistic at this point. The current downturn should create consolidation and force vendors to become more efficient, leading to improved profitability when demand rebounds.

In addition, there is an acquisition offer as a backup if Stratasys’ business continues to struggle. Stratasys has given little information on the progress of its strategic review, other than stating it is engaging and making progress. Nano Dimension’s offer remains on the table though and is at a large premium to where Stratasys’ share price currently sits.