Stratasys Stock's Return from the Stratosphere Screams Buy

Stratasys (NASDAQ:SSYS) and the 3D printing stocks are having a resurgence this year. After being one of the hottest industries in the early part of last decade the group is enjoying a reunion tour to kick off this decade.

While much of the rally has stemmed from increased demand for 3D printers from the medical profession during the pandemic, Stratasys has much more going for it. In the wake of another positive earnings report, its stock looks like its ready to party like its 2012.

 How Did Stratasys Perform in Q4?

Israeli 3D printing leader Stratasys ended its fiscal year on a strong note. Revenue was down 11% year-over-year to $142.4 million but increased 11% sequentially. The company swung from a $2.8 million loss a year ago to a profit of $11 million thanks to an effective cost savings strategy.

COVID-19 continued to have an impact on operations during the quarter. Demand from automotive and aerospace customers was muted due to soft demand from their own customers—and will likely remain so in the near-term.

On the other hand, strong demand for 3D printed medical equipment is a major tailwind for the business. Stratays's PolyJet and FDM printers have been well received by the medical market. The FDM technology uses production-grade thermoplastics to build in-demand medical equipment parts layer by layer from the bottom up.

The most encouraging aspect of the quarter was the $23.7 million in operating cash flow. This was the company's highest level of cash generation since the first quarter of 2018. It confirms the improving efficiency and competitive advantage of the Stratasys business model.

What are the Growth Prospects for Stratasys?

As quickly as 3D printing companies stormed onto the stock market scene a decade ago, they fizzled out amid concern over cost structures, market size, and overall growth prospects. Some felt there were limited opportunities for growth and considered 3D printing more of a novelty act for hobbyists and small-scale manufacturers.

Fast forward to today, and the industry has undergone a major facelift. More and more industries are recognizing the cost efficiency of using 3D printers which have come down in price. Stratasys serves a wider range of customers through its five-3D printer lines. It offers specialized 3D printing solutions for engineering, manufacturing, tooling, and medical and dental modeling.

Together these end markets represent a large, growing addressable market for Stratasys. The company estimates that its total addressable market will grow at a 26% rate over the next 10 years approaching $150 billion by 2030. Much of this growth is expected to come from the manufacturing and prototyping markets which together are expected to top $40 billion by 2025. This is a good sign because Stratays generates more than a quarter of its revenue from manufacturing customers.

The company's focus is providing technologies that help manufacturers develop cost effective products from start to finish. With more than 200 channel partners Stratasys has the largest network in the industry. This gives it an advantage because it is better positioned to go directly to the end markets it serves.

Over the next five years Stratasys management expects sales growth to accelerate. Given its expanding lineup of top tier customers its easy to see why. Google is using Stratays 3D printers for its Project Jacquard to make wearable technology come to life. So too is Volkswagen for its automobile parts and Boeing for its airplane parts.

 Is it a Good Time to Buy Stratasys Stock?

An attractive aspect of the Stratasys business model is its revenue mix. Based on the most recent quarter, it derives 70% of sales from products. This includes both its big-ticket 3D printers and the consumables associated with them—polymers and other materials used in the printing process. Think the Gillette razor-razor blade model or the Illumina sequencer-array model but for 3D printing.

The remainder of revenue comes from service in the form of printer maintenance and other customer support. This along with Stratays's diversified customer base makes for a well-balanced growth machine.

An increasing use of 3D printers in manufacturing and additional applications for the technology bode well for long term industry growth. Stratays should be among the biggest beneficiaries of this growth given its well-established relationships and opportunities to expand into new markets.

From a financial perspective, Stratasys has strong metrics relative to competitors. An absence of long-term debt on the balance sheet will strengthen its ability to pursue growth opportunities as the cash piles up. Given the current trend in cash flow, Stratasys may be at an inflection point and on its way to sustainable long-term growth—and printing money for stockholders.