Stratasys Stock and Its Costly Acquisition Addiction
About 20 years ago, the Financial Accounting Standards Board (FASB) introduced a new concept called goodwill impairment, which despite the name has nothing to do with being charitably challenged (see Jeff Bezos). Just the opposite, in fact. Goodwill in accounting speak refers to the premium one company
donates pays for another that is supposed to represent intangible assets like brand name, sex appeal, market potential, etc. The goodwill impairment comes into play when it becomes apparent that part or all of that premium price was pure horse poo. Previously, it had been easier to keep potentially big losses quiet by amortizing the financial hit over decades.
One of the most famous examples of how this works occurred shortly after this new standard in generally accepted accounting principles (GAAP) went into effect. It involved the infamous 2000 AOL-Time Warner merger where the former actually acquired the latter. The dot-com bubble burst about the time the dust had settled on the deal, revealing that AOL itself had been way overvalued, with the combined company taking a one-time loss, or goodwill impairment, of $59 billion.
So, what does all that have to do with our topic today, the current status of one of the oldest and biggest 3D printing companies in existence today? We’ll get to that shortly.
About Stratasys Stock
In our last check-up on Stratasys (SSYS), an Israeli company with headquarters in Min-ee-soda, the stock had been on an inexplicable upswing, buoyed by some short-lived optimism in 3D printing stocks predicated on upbeat news by its chief rival 3D Systems (DDD). As you can see in the chart below, 3D printing hype reached its peak around 2013-14, with something of a much more modest rebound in the Rona years. The green mountains represent Stratasys stock performance since it IPO’d in July 2008, against 3D Systems (blue line) and Invesco QQQ Trust (QQQ), a popular exchange-traded fund (ETF) that tracks the Nasdaq-100 Index (pink line). You can see where you might have wanted to put your money long term, and it’s not in either 3D printing stock.
Regular readers know that we’ve shifted our investing strategy away from pure-play 3D printing stocks to distributed or on-demand manufacturing stocks. While 3D printing is one of those technologies that never really lived up to the hype, the investment thesis has always seemed like a solid one but no company seems to be able to pull it off. The recent pandemic seemed like another opportunity for the technology to gain traction at a time when manufacturing supply chains started rusting through. Stratasys always appeared poised to be the one, but the nearly 35-year-old company has never been able to pull it all together. And one of the biggest stumbling blocks has been in the acquisitions department. Stratasys has a hoarding problem when it comes to 3D printing companies.
The Stratasys Hoarding Problem
Stratasys has acquired more than a dozen companies over the last decade. The current version of the 3D printing company is actually the result of a 2012 merger/acquisition between Stratasys and a fellow Israeli outfit called Objet Geometries. At the time, Stratasys spent $624 million to bring Objet and its line of 3D printers into the fold. In Q3-2020, however, Stratasys reported a goodwill impairment of $386 million from that deal, which was basically the premium paid for Objet based on all the intangibles that management thought would eventually emerge. That big Q3-2020 accounted for about 87% of the company’s $443 million in losses that year.
The bullish among you might note that revenues finally went up in 2021 after six years of steady decline, but we’re still not convinced management is really turning things around. After all, there’s a history of Stratasys acquisitions not exactly performing up to snuff. In 2013, for instance, Stratasys acquired Brooklyn-based MakerBot in a deal valued at $403 million for the 3D desktop printer company. Three years later, MakerBot began outsourcing manufacturing of its 3D printers to China, laying off staff and heavily discounting its printers in the process. Around the same time, a lawsuit against Stratasys and MakerBot for knowingly releasing defective printers into the market was dismissed with prejudice, meaning someone probably knew that the new extruder technology wasn’t ready for prime time but there wasn’t enough hard evidence to move the needle.
Now Stratasys is putting more distance between it and MakerBot by spinning this hot potato of a company off via a merger with Ultimaker, another 3D desktop printer company. Stratasys will retain a minority stake in partnership with majority owner NPM Capital, an investment company that focuses on startups in Belgium, the Netherlands, and Luxembourg (a political entity known as Benelux, your new word for the day). Stratasys and NPM Capital will reportedly seed the as-yet unnamed new venture with about $62 million.
More Stratasys Acquisitions
Five years passed before Stratasys went back on a buying spree in 2020, gobbling up four more companies, including San Francisco-based Origin for $100 million. The 3D printing startup had raised about $12 million in disclosed funding to develop its proprietary Programmable PhotoPolymerization technology, which Stratasys expects “to be an important growth engine for our company.” The acquisition, the company goes on to say, will help fortify its position for 3D printing in industries such as dental, medical, and tooling, as well as industrial, defense, and consumer goods markets.
It added two more companies last year. In February 2021, Stratasys acquired UK-based RPS for an undisclosed amount. RPS develops industrial stereolithography (SLA) 3D printers and solutions, such as tooling investment casting patterns, anatomical modeling, orthodontic clear aligner molds, and large design parts. Stratasys says the global total addressable market (TAM) for industrial stereolithography systems is just $150 million, with a growth rate of 10% per year. Seems kind of niche. Later in the year, Stratasys acquired all remaining shares of Xaar, which apparently is not the name of a supervillain from Superman II but a 3D-printing company that powers a new line of 3D printers that allegedly deliver “cost-competitive parts at production-level throughput.”
And just last month, Stratasys paid about $43 million for the additive manufacturing materials business of Covestro AG (COV.DE), a German plastics company that once belonged to Bayer. This acquisition could make sense if Stratasys can find a way to increase the profit margin on its consumables business by owning the materials that are used on its various 3D printing platforms.
Stratasys Revenues Lack Granularity
In fact, when managed well, acquisitions can obviously be a boon to a company’s bottom line and its intellectual capital. Unfortunately, it’s impossible to say how the Stratasys acquisitions will perform until something bad hits the news because the company does not provide the sort of granularity into its revenues that investors deserve.
Revenues are broken down into products and services. The former includes 3D printing systems and consumable materials, while the latter accounts for Stratasys’ own on-demand manufacturing services, along with warranty and maintenance contracts, spare parts, and other services. That’s it. No split on hardware versus consumables, or how much money the company’s on-demand manufacturing business is making or losing. Consumables are a good place to increase gross margin, for example, so it would be nice to know how that segment is performing. Strangely, Stratasys notes that in 2021, revenue for 3D printing systems was up 32.3% while consumables increased 15.3% over 2020, but there are no actual dollars attached to these percentages. Show us the money, Stratasys.
When it comes to survivability, the firm has about $438 million in cash and lost around $25 million last quarter. Simple math gives them a runway of about 4.4 years of runway. That’s plenty of time to cut back on costs and let their decent (for a hardware company) gross margin of 43% (based on 2021 financials) swing them to profitability.
The best we get are projections of between $675 million to $685 million in revenue for 2022, which would represent about an 11% increase from last year. That would bring Stratasys close to where it was five or six years ago (not counting inflation-adjusted dollars) and mark two straight years of revenue growth. That’s certainly encouraging, but with Stratasys it seems we’re always waiting for the dust to settle from the latest round of acquisitions to see if the company can find some synergies and success integrating these new businesses. Even if it does, we’ll unlikely be able to see the results based on how the company currently breaks down its revenue. Until then, we really don’t know what’s working and what’s not – and that doesn’t work for us.
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