strategic valuation - stratasys

8/9/2019 Strategic Valuation - Stratasys

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Strategic Valuation of Stratasys Inc

Stratasys Inc. (ticker: SYSS) engages in the manufacture of three-dimensional (3D) printing

machines, rapid prototyping (!) systems, and direct digital manufacturing (DD") machines

across most of the de#eloped countries. $hese systems ena%le engineers and designers to create

models, prototypes, and e#en actual &orking parts directly from 'D designs. "aor markets

include design la%oratories, manufacturing firms, architects, engineering schools in a list limited

only %y the imagination of the user. Stratasys* main competitors include 3D Systems, +%et, and

'orp. nalysis of the success factors sho&s that the company relies on the emerging and

rapidly gro&ing market for three-dimensional printing that hold potential to generate the net

technological re#olution in manufacturing processes.

$he Strengths-eaknesses-+pportunities-$hreats (S+$) analysis for Stratasys re#eals the

follo&ing factors:

Strengths

- "aor strength is the reputation for inno#ation , relia%ility, and credi%ility that gi#es its a

lead o#er eisting players and potential ne& entrants

- Stratasys has in#ested hugely in research and de#elopment and continues to do so to add

to its portfolio of products and ser#ices

- ero %orro&ings place the company in an ecellent position to raise de%t to finance rapid

epansion in keeping &ith market demand

- /arge portfolio of eisting satisfied customers that generates repeat demand and demand

for consuma%les and spares pro#ides the company &ith a minimum assured sales le#el.

eaknesses


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- $hree-dimensional printers are #ery epensi#e there%y restricting market opportunities

- $he limited num%er of materials that 3D printers can presently use to make models and

parts (presently nine) further restricts market si0e

- Stratasys has a limited market reach in its present market co#erage that includes 1orth

merica, 2urope, and ustralia. o&e#er, it has made a small entry into emerging

markets such as India and 'hina recently

- /o& le#el of intellectual property rights on technology make it #ulnera%le to competition

+pportunities

- $he main opportunity lies in eploiting the emerging markets in de#eloping countries that

include 'hina, 4ra0il, India, ussia, and South frica. "aor market opportunities also

eist in the rapidly de#eloping economies such as $ai&an, "alaysia, and $urkey etc.

- /arger #olumes &ill lead to lo&er cost and help increase market penetration and market

si0e

- /arge opportunity eists in 5manufacture* of parts &ith more materials 6 for the human

%ody for eample, a %one transplant that doctors can engineer to meet the eact si0e and

shape for the indi#idual patient.

$hreats

- 2isting competition and rapid entry of ne& players in the market &ill challenge the

company on market share. +ne can see a 5price &ar* emerging in the foreseea%le future.

- apid di#ersification and epansion could place maor pressure on the company*s

resources %oth human and financial.

- $he company appears to ha#e #ery fe& patents on technology. 'heap products from

'hina and other de#eloping countries %oth in the e7uipment and consuma%les markets

&ill pose a maor threat.


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- 'ro&d sourcing &here people across countries and different demographics come together

to create open-source soft&are and product ideas could emerge as a potential threat.

Porters Five Force Analysis

Stratasys is the current market leader in the rapidly e#ol#ing market &ith all players epanding

sales rapidly. 'ost of printers has declined rapidly &ith simple desktop printers %eing offered for

less than 89,9compared to the massi#e price tags (se#eral hundred thousand dollars) on the

first 3D printers on the market. nalysis of its %usiness en#ironment using !orter* fi#e-force

dimensions re#eal the follo&ing picture:

- Threat of New Entrants: appears high %ut rapidly declining in force as the market

reaches saturation

- Bargaining Power of Buyers: is etremely high %ecause the potential %uyer has a #ast

market offering to choose from

- Threat of Substitutes: is lo& %ecause no alternati#e product or technology appears on the

hori0on to pro#ide a #ia%le alternati#e to 3D printing

- Bargaining Power of Suppliers: appears moderate to strong %ecause the company does

not ha#e in-house manufacturing facilities for the hard&are and consuma%les %ut relies

on custom manufacture %y outside #endors

- Rivalry among Competitors: is intense as many competitors #ie for the customer dollar

1http:;;&&&.hongkiat.com;%log;afforda%le-3d-printer;


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$he analysis re#eals a shifting focus on price leadership as the initial sunk costs and total

o&nership costs are declining rapidly. $echnology differentiation appears to %e declining %ut the

industry &ill sur#i#e and gro& as the only su%stitute is to re#ert to traditional prototyping that is

epensi#e and time consuming. $he total market for 3D printers &as approimately 8 in =9< to reach

8??@million in =9


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Figure-1: Market Mix and Grot!

(Source: Business nsi!er "ebsite#accesse! $pril %&' %&)*

Financial Analysis

ey operational performance and financial position indicators for %oth companies appear in

$a%le-9 and $a%le-= %elo&:

Indicator2008 2009 2010 2011 2012 CAGR

Revenue$124,49

5 $98,356$117,09

9$155,89

4$215,24

4

Growth 10.9% -21.0% 19.1% 33.1% 38.1%13.91

% 38.07%

Annual Growth

Gross Margin 11% -30% 21% 47% 33%12.98

% 38.07%

Operating Margin 11% -72% 131% 115% -41% -1.51% 40.97%

et Margin 2% -70% 124% 127% -41% -1.89% 40.96%

et !n"o#e -5% -70% 128% 120% -59% -9.93% 58.83%

EPS 0.65 0.2 0.44 0.95 0.36

Key Metric !! "# Syte$

Revenue$230,42

3$353,63

3

Growth 53.5%Annual Growth

Gross Margin 66.19%

Operating Margin 73.55%

et Margin 33.39%

et !n"o#e 19.36%

EPS 0.71 0.70

"a#le -1: $ey %&erational Metric Grot! ' Stratasys and () Syste*s

(Source: Company publishe! !ata an! own calculations*

IndicatorStratay "# Syte$

2010 2011 2012 2012%i&uidity

- rrent &atio 3.24 5.09 5.96 3.82

Activity

3 http:;;&&&.%usinessinsider.in;'2DI$-SEISS2-3D-!rinting-Is-Foing-$o-4e-ay-4igger-

$han-hat-$he-3D-!rinting-'ompanies-re-Saying;articlesho&;==?AC=9.cms


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- !n'entor( )rno'er 3.41 3.23 1.55 4.12

- *'erage o++. erio 62.50 61.42 148.57 82.44

- i/e *sset )rno'er 3.92 3.93 3.47 10.29

)ota+ *sset )rno'er 0.66 0.70 0.12 0.52

#e't

etit( &atio 7.59% 5.33% 1.21% 23.51%Pro(ita'ility

Gross roit Margin 47.90% 52.86% 51.06% 51.24%

Operating roit Margin 11.50% 18.61% 7.95% 17.13%

et roit Margin 8.00% 13.23% 3.94% 11.27%

&etrn on !n'entor( 5.25% 9.30% 0.49% 5.88%

&etrn on it( 6.15% 11.25% 0.54% 8.30%

Operating &O! 7.55% 13.08% 0.99% 8.94%

"a#le -+: $ey %&erational Metrics ' Stratasys and () Syste*s

(Source: Company publishe! !ata an! own calculations*

$he num%ers in ta%les 9 and = a%o#e indicate the position and performance of t&o companies at

the takeoff stage of gro&th. It is important to read these num%ers in the contet of some rele#ant

o%ser#ations. !rimarily, dependence on the ES and 2uropean countries* markets to generate

re#enue and profita%ility affected %oth companies almost e7ually &hen the economies of these

countries entered a recession in late =C. o&e#er, it is interesting to see that &hile stocks of

other companies (as indicated %y the 1YS2 'omposite Inde) and information technology %ased

companies (as indicated %y the SG! H Information $echnology Inde) continued to struggle,

the stocks of these t&o companies skyrocketed. Bigure-= %elo& sho&s the #alue of 89 in#ested

in any of the four options as on Decem%er 39, =9


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2007 2008 2009 2010 2011 2012

$0

$100

$200

$300

$400$500

$600

$700

Value of $100 invested in 2007

3D SystemsNYSE Composite

Index

S& In!ote"# Index

St%t%sys

Year

Figure-+: Stock Perfor*ance

(Source: +ahoo ,inance an! own calculations*

$he second o%ser#ation is that the performance of Stratasys appears to ha#e suffered in the year

=9= in comparison to =99. $he primary reason for this is the sudden increase in the 5Sales and

Feneral dministration* epense from 83@million to 8A3million. $he company says this is

%ecause of amorti0ation of trade name and customer relations (amount not specified) in an

o%#ious reference to the premium paid on ac7uisition of +42$. In addition, the company

charged a sum of 8?9H, epenses paid for the ac7uisition to epenses for the year. $his

treatment of ac7uisition cost and amorti0ation of ac7uisition cost to re#enue raises dou%ts a%out

the correctness of the accounting entries, &hich must other&ise reflect in the capital cost and

depreciation schedule.

Fi#en the situation eplained a%o#e, it is not surprising that results for =9= appear toned do&n

despite an increase in sales from 89HHmillion to 8=9Hmillion and increase in gross profit %y

33.3C>.


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$he cyclic performance of the stocks of %oth companies compared here perhaps reflect

customers delaying purchase decisions in uncertain times com%ined &ith increased competition

leading to lo&er profit margin. s the economy picks up and foreign markets open up to entry,

&e can forecast a strong gro&th in stock #alue for the net t&o years follo&ed %y a small slump

in performance. $he fact that the company has not diluted total num%er of shares and has not

sought to o%tain credit for organic or inorganic epansion are further positi#es that must restore

in#estor confidence.

,istorical "rends

4oth Stratasys and 3D Systems are small market capitali0ation companies engaged in a field that

is e#ol#ing #ery fast. 4oth companies ha#e %een in eistence for many years %ut it is only in

=A that the market %egan to take off. o&e#er, the economic slump follo&ed immediately and

affected their performance su%stantially. +ne &ould normally epect these companies to record a

gro&th of =H-3H> %ut the 'F num%ers sho& relati#ely anemic performance %ecause of the

slo&do&n o#er &hich they had no control. In addition, the massi#e reported fall in operational

efficiencies for reasons of capital epenses %eing charged to re#enue makes it difficult to use the

num%ers to make any forecast of operations and future profita%ility.

nalysis sho&s that SYSS is a financially sounder and sta%le in its performance compared to 3D

Systems if &e look at the 2!S for =99. In =9=, if &e add %ack the amorti0ation and ac7uisition

epense, the 2!S &ould pro%a%ly %e %etter than that and much higher than the .A98 per share

recorded %y 3D Systems.


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SYSS in#ested @.9= and @.93> of its total re#enue on research and de#elopment compared to

?.== and ?.H?> in#ested %y DDD in =99 and =9= respecti#ely. In dollar amounts the spend on

GD %y the t&o is almost e7ual. In addition, SYSS has concentrated on ac7uisitions as an

important path to gro&th thus far. e can assume that the effect of these in#estments and

ac7uisitions &ill %egin to influence the %ottom line in the near future.

Valuation

$he discounted future cash flo&s (D'B) or the present #alue of proected cash flo&s appears

difficult gi#en the circumstances discussed a%o#e making it necessary to adopt a different

approach. Bor this, the 24I$D "ultiple approach appears as a %etter solution %ecause of its

simplicity and %ecause it helps eliminate the tedious (and in this case the difficult) and ineact

task of estimating future cash flo&s. "oyer (=


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method ranges %et&een 8


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'apital e7uipment market for 3D printers must e#entually go the same &ay as the eisting

printers &ith emphasis shifting to supply of consuma%les and spares. $he company must

strategi0e to %e in a position to eploit this market and de#ote more GD spend to increasing the

possi%ility for use of more materials for printing and these need to include organic %iodegrada%le

materials.

Stratasys must analy0e its eisting %usiness to identify areas of core competence present and

future competitors &ill find difficult to replicate and focus on %uilding on these competencies.

$his &ill permit the company to esta%lish niche markets for itself &ell protected from

competiti#e pressure.

$he company must enter into long-term agreements &here possi%le and eamine the possi%ility

of lease-purchase agreements &ith customers that encourage and %ind the customers to deploy

3D printing in more manufacturing and design processes and continue to %uy consuma%les and

spares from Stratasys.

eferences

Bruhan, .2. r. (9@A@): L$he 1!M "odel of StrategyN$he Shareholder Malue "odel,L in

Financial Strategy: Studies in the Creation, Transfer, and Destruction of Shareholder

Value, ichard D. Ir&in, ome&ood, I/

"iller, D. (9@@=): L$he generic strategy trapL, The Journal of Business Strategy, Mol. 93(9): 3A-


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strategic valuation - stratasys

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