On Apr 10, 2015, Zacks Investment Research downgraded Stratasys Ltd. SSYS to a Zacks Rank #5 (Strong Sell). Going by the Zacks model, companies holding a Zacks Rank #5 are likely to underperform the broader market.
Most of the estimates for this 3D printing solutions provider have been moving downward since it reported dismal fourth quarter 2014 results on Mar 2.
Why the Downgrade?
The company’s adjusted earnings (excluding amortization, impairment and other one-time items but including stock-based compensation) of 31 cents per share missed the Zacks Consensus Estimate of 41 cents. Moreover, adjusted earnings decreased 20.5% year over year.
Also, total revenue of $217.1 million fell short of the Zacks Consensus Estimate of $218 million. According to Stratasys, fourth-quarter results were negatively impacted by slower revenue growth at its MakerBot business. Challenges associated with the introduction and scaling of its new product platform and the company’s rapidly evolving distribution model primarily affected the MakerBot business in the fourth quarter.
Moreover, the company’s adjusted operating expenses increased 52.8% year over year primarily due to acquisitions as well as investments in sales, marketing and research related to product innovations. Going ahead, the company is projecting its operating expenses to increase over the next two to three years as a result of its new investment plans. This makes us skeptical about its future performance.
We remain concerned about the company’s declining margins, which have been impacted by incremental sales of lower-margin products from newly acquired businesses including MakerBot, Solid Concepts and Harvest Technologies. Additionally, some customers are delaying their purchases owing to the current economic conditions. In the 3D printer business, the majority of customers have gravitated toward the lower-priced uPrint, which may affect the company’s margins in the upcoming quarters.
Stratasys has reiterated its 2015 guidance. The company continues to project revenues in the range of $940 million–$960 million (mid-point $950 million). The Zacks Consensus Estimate stands at $951 million.
A dismal performance in fourth-quarter 2014 and a not-so-encouraging outlook resulted in downward estimate revisions for Stratasys. Over the last 60 days, the Zacks Consensus Estimate declined 17.4% to $1.52 per share for 2015.
Furthermore, rapid growth in the 3D industry is creating financial pressure as the company has to constantly invest in research and development while raising funds for acquisitions. Moreover, severe competition in the industry amid persistent economic uncertainty and foreign currency risks remain concerns.
Stocks to Consider
Not all technology stocks are performing as poorly as Stratasys. Better-ranked stocks include GrubHub Inc. GRUB, NetSol Technologies, Inc. NTWK and Avago Technologies Ltd. AVGO, all of which sport a Zacks Rank #1 (Strong Buy).
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