Stratasys: Potential upside possible due to M&As (NASDAQSSYS)

Stratasys Ltd.NASDAQ:SSYS) delivers a significant amount of cash and expertise in the M&A markets. I believe that additional investments in research and development, and more agreements with channel partner could lead to significant revenue growth. There are risks. lower acceptance of 3D printing solutions and failed M&A operations. However, based on my projections of future free money flow, I believe the stock price is too low. The stock valuation was significantly higher than my discounted cash flow model.

Stratasys: Adoption of 3D printing and acquisition of partners will likely increase revenue generation

Stratasys provides additive manufacturing services that include innovative 3D printing solutions. The clients come from many industries, including aerospace, automotive and consumer products. The company also offers a large selection of printers and software that can be used with different materials.

Stratasys Ltd. is a great opportunity to study, given the adoption of 3D printing solutions by clients from different sectors. Axial3D recently signed an agreement to serve most hospitals in many countries around world.

We believe that Axial3D can help us remove the barriers to entry in many countries, allowing us to dramatically increase the use 3D printing in pre-surgical planning, so it is a standard part patient care.

Source: Stratasys Makes Strategic Investments In Axial3D

It is worth mentioning that Stratasys will be acquiring a significant amount of partners and competitors. This will likely boost FCF growth. Stratasys acquired Riven after a period of collaboration. Riven’s services will be available to clients in Stratasys GrabCAD Printer software.

The Berkeley, Calif.,-based start-up has been a Stratasys connectivity software partner and its cloud-based software solution will now be fully integrated into Stratasys’ GrabCAD® Additive Manufacturing Platform, benefiting customers using any Stratasys 3D printer running GrabCAD Print software.

Source: Stratasys Acquires Riven, a Software Company, to Streamline Quality Assurance For Production-Scale Added Manufacturing

Balance Sheet

The company had $182 million in short term deposits and $255 million in cash as of June 30, 2022. I believe the current market capitalization is below $1 billion. Stratasys seems to be undervalued.

Stratasys does no report long term debt. This is something that most investors will appreciate. Total liabilities total $306 Million, which means the asset/liability rate is equal to 3.9x. I believe that Stratasys Ltd.’s financial health is good.

Other financial analysts expect 11% sales growth in 2024 with a 10% EBITDA Margin, and close to 3% FCF Margin.

Stratasys Ltd.’s optimistic outlook is worth mentioning. Others believe that sales growth will be between 5% and 11% in 2023-2024. The EBITDA margin would remain at around 7% from 2019-2024. The FCF margin could reach 1%. These figures were used in my base case scenario. Please take a look at them.

Base Case: Application and Proliferation 3D Content will likely lead to substantial growth

Stratasys will likely grow due to the increased use of 3D content and advancements in AM technology platforms. Revenue growth will likely increase as more manufacturers discover new applications and the company’s offering grows, because the target market is larger.

We expect that the growth will lead to a major shift to more manufacturing application solutions than our current focus on design and prototyping. We will continue to invest in new applications, especially manufacturing applications, for which our proprietary software, printing technologies and materials are suitable. This has allowed us to offer the largest range of Polymer 3D printing options in our industry, which serves a diverse array of end markets. Source: 20-F

I also anticipate a gradual increase of channel partners working alongside Stratasys Ltd., which will likely lead to the company’s networks expanding into new regions and possibly making it more visible for clients. Let’s not forget that Stratasys Ltd. is making great efforts to make the brand more well-known and to increase awareness about 3D printing solutions.

This strategy aims to increase awareness about 3D printing solutions for prototyping/manufacturing and to develop industry-specific channels of sales to support our efforts to commercialize a wider variety of new manufacturing and production technologies. Source: 20-F

In this case, I used a WACC 9.7%, net sales growth close at 8%, and EBITDA margin 8.37% between 2024 and 2030. The results show that 2030 FCF was close to $26 Million and FCF margin of around 1.9%. The total enterprise value would rise to $636 million if we use an exit multiple 12x. If we add cash of $255 Million and short term investments $182 Million, and divide that by the share count, then the implied price would be $16.07 at an IRR of 2.2%.

Best Case Scenario

Under my best case scenario, I expect that the company’s R&D efforts and new innovation related to Stratasys’ PolyJet and FDM printing technologies will bring further revenue. I also assumed that the EBITDA margin of the company would remain relatively high due to Stratasys’ market position.

We will seek to extend our technological capabilities by addressing manufacturing applications and continuing to invest in our R&D efforts, which focus on enhancing our 3D PolyJet and FDM printing technologies

Source: 20-F

I also assumed management would use a portion of the cash for inorganic growth. This means that Stratasys Ltd. might acquire competitors that could lead to revenue growth. Management may also seek out technological innovations from smaller competitors.

I used optimistic assumptions to assume net sales growth of around 10%, a margin of 10% in EBITDA, and a margin of 2.5% in FCF for 2030. The net sales would be $1.3 billion, with 2030 FCF close at $35 million and an implied enterprise worth almost $1.5 billion. The implied equity valuation would be close to $1.905 billion. It would have a fair price at $28.5 per share, and an IRR of 6.

The risks include lower acceptance of 3D printing or failed acquisitions

To expand its polymer solutions, the company had acquired several businesses in the past. In this scenario, I expected that some of the acquisitions wouldn’t be as successful. I’m talking about obtaining lower levels of synergies than anticipated. Additionally, the solutions you have acquired may not be able to perform in the future.

We acquired Origin Laboratories, Inc., or Origin, and its P3™ Programmable PhotoPolymerization technology in December 2020, which we believe will help to further strengthen our position in that area. In 2021, we purchased UK-based RP Support Ltd. or RPS, a provider industrial stereolithography 3D printers. We also acquired Xaar 3D Ltd. or Xaar and its powder-based SAF tech, which will allow us to accelerate our growth in 3D printing. Source: 20-F

Stratasys Ltd. might also experience lower acceptance of 3D printers. Clients may not realize the technology is used in their products if they don’t appreciate it. Accordingly, revenue growth would be lower that initially expected.

If the commercial market does not accept 3D printing and DDM as alternatives to traditional manufacturing, our operations could be negatively affected. Source: 20-F

Stratasys might also be affected by the 3D printing industry’s competition. Peers might lower the prices of their products, which could impact Stratasys revenue and possibly the company’s margins. The company’s value would decrease if Stratasys had to lower its prices.

Our operating results will be negatively affected if our business cannot offset price reductions or reduced volume due to market contractions by improving operating efficiency and reducing expenditures. Source: 20-F

Under very pessimistic circumstances, I assumed net sales growth of 3.5%, an EBITDA margin margin of 5% and 2030 FCF margin margin of 1.5%. My results would include a 2030 FCF value of $15 million, a enterprise value of close $360 million, and implied equity of $795 millions. Final, the fair price would come in at $11.95 per shilling with an IRR below 2%.

My Takeaway

Stratasys has a lot of cash and is operating in the 3D printing industry. This will allow for sales growth. My DCF model produced a valuation that is higher then the current market price, given normal circumstances and optimistic assumptions. In my view, most investors don’t seem to understand how M&A could be a great catalyst of revenue. In addition, new innovations and channel partners from different industries could help increase the target markets. Yes, there are risks of failed acquisitions and lower acceptance for 3D additive production, but I think the downside risk to the stock price is minimal.