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Morningstar | Stratasys Plans to Kickstart Growth with Enhancements to Incumbent Technology and New LPM Printers

Stratasys’ foray into three-dimensional printing, or additive manufacturing, began with the inception of its fused deposition modeling, or FDM, technology. After a 2012 reverse merger with Israel-based Objet, the third-largest 3D printing company at the time, Stratasys' suite of 3D printing technologies expanded to include PolyJet binding technology. With this on top of a range of printers spanning the consumer and industrial markets, Stratasys offers clients a closed ecosystem of add-on software and proprietary materials, encompassing nylons, polymers, and metals. Stratasys relies on a razor-and-blade model, selling printers at a discount to reap higher margins from cross-selling materials and software. It also offers direct manufacturing capabilities for customers uninterested in acquiring printing technology and corralling engineers to handle the technology in-house. Traditionally, Stratasys accumulated intellectual property through a combination of research and development, spending a sector-high 14% of sales, and acquisitions, spending roughly $200 million between 2013 and 2017. While its efforts were successful before 2014, a combination of expiring patents, increasing competition, and rapid expansion through its serial acquisition strategy weighed on performance, sent the shares into a tailspin, and resulted in management turnover. According to Wohlers Associates, new manufacturers selling print systems (units priced above $5,000) globally in 2017 totaled 135, a steep climb from the 97 recognized in 2016 and the 62 recognized in 2015. We continue to expect excess supply and growing competition will pressure operating results in the near term, but consolidation in our midcycle period will tighten supply and drive incrementally higher profit margins. Stratasys plans to focus its attention on fortifying sales infrastructure and sales operations in the coming years. Given the pace of recent innovations, influence of Objet leadership, and the prerequisites for Stratasys’ new CEO, we believe the company is shifting from its innovation-fueled founding toward a more sustainable operational structure.