It would be a gross understatement to say that shares are 3D printing specialist Stratasys, Ltd. (NASDAQ:SSYS) are under pressure.
“Annihilated” would be the more suitable term, given that SSYS stock has lost 22% of its value Wednesday alone. And if you think the damage is over, guess again. SSYS stock looks like a falling knife.
So before placing a bet right here, be sure to wear some protective gloves. Now’s not the time to play hero thinking the market has “gotten this story wrong.” Consider, not only is SSYS stock down more 50% on the year to date, the shares are also down 20% in the past three years. And even though SSYS stock might be at its 52-week low, these shares can fall another 10% to 15% and still don’t offer any value.
Why? After 2014 earnings plummeted over 250%, Stratasys just revealed what smart investors had already known — the market for the 3D printing industry is not as robust as initially believed.
Tuesday, Statasys announced full-year 2015 guidance and preliminary results for its first quarter ended March 31. The Eden Prairie, Minnesota-based company now expects first-quarter revenue in the range of $171 to $173 million, implying a 13% to 14% shortfall from Street estimates of $199 million. Adjusted earnings per share ranging from 2 cents to 4 cents assumes 85% shortfall of Street expectations of 28 cents.
From my vantage point, Street analysts — who should be talking to this company continually — don’t have a clue about what’s going on. Full-year adjusted earnings estimates have been slashed almost 30% just in the past three months, from $2.91 per share at the start of the quarter to $2.10 per share now.
From my vantage point, it makes perfect sense to re-adjust price targets to assess a reasonable fair value for SSYS stock. That earnings were over-estimated by 30%, it makes sense to adjust SSYS stock by an equal 30%, right?
With the stock down 20% Wednesday, another 10% decline puts SSYS stock around $37 per share — and that’s being conservative. The more reasonable target suggests $30 per share.
The Case for $30 Per Share for SYSS
Why $30? For starters, assuming Stratasys does earn $2.10 this year as expected, it means SYSS would have only grown earnings 5% above last year. And assuming Stratasys does generate $2.10 per share for 2015, next year’s earnings of $2.45 calls for only a 16% year-over-year increase.
Double-digit earnings growth for 2016 sounds impressive, yes. But when combined with projected growth for 2015, it averages out to a two-year annual growth rate of only 10.5%. And that’s assuming Stratasys doesn’t cut guidance again in the quarters ahead.
From a valuation perspective, based on 2016 earnings estimates of $2.45, this puts the forward price-to-earnings ratio for SSYS stock at 12. While that may be at a discount to the S&P 500, the average S&P 500 company is growing earnings, not slashing estimates.
Accordingly, the $30 price target serves as protection for against another guidance cut, which I expect to come by next quarter given the rate at which the 3D printing market continues to slide.
And next year, when larger rival Hewlett-Packard Company (NYSE:HPQ) enters the mix with its own 3-D printer, Stratasys and other smaller players like 3D Systems Corporation (NYSE:DDD) will bleed even more cash to stay above water.
That doesn’t bode well for SSYS stock.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
