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Stratasys Is Not Out of the Woods

- By Harsh Jain

After reaching bubble territory in 2013, 3-D printing stocks edged lower consistently over the next few years to reach a bottom in 2016. With the likes of 3D Systems Corp. (DDD) and Stratasys Ltd. (SSYS) trading sideways for the last few months, I think it is safe to assume the stocks have seen a bottom for now.

Going forward, I think investors should stay away from the sector as the lack of profitability on account of increased competition and flat revenue growth still makes the sector too expensive to own.

Stratasys released its fourth-quarter 2016 earnings on March 9, reporting EPS of 15 cents, easily beating the estimates of five cents. On the revenue front, Stratasys reported timid growth of 1% on a year-over-year basis, with sales coming in at $175 million. The growth was a positive surprise as analysts were expecting the company to report roughly $170 million in sales.

While the earnings lead to a breakout, I think investors should use this opportunity to exit the stock or to initiate a short position as Stratasys' valuation is too high to be sustained.

Stratasys currently commands a market cap of over $1 billion, but its annual sales are hovering in the region of $700 million. With a price-sales ratio of 1.5, the stock is definitely expensive. Apart from that, the company is also losing money and is not expected to turn profitable in the near future. In addition, due to intense industry competition, I do not see the company reporting growth in both sales and profits going forward.

The company is already resorting to cutting costs as it sacked 30% of its MakerBot workforce. While cost cutting is a good thing, it also shows its days of growth are well and truly over. It is quite possible the company will never grow into its $1 billion market cap.

Summing up

Despite the 3-D printing industry gaining some momentum over the last few weeks, I think investors should avoid it due to the reasons discussed above. Given the company's overvaluation, lack of profitability and its inability to improve sales, Stratasys is likely to head lower in the near future. As a result, I think investors should short Stratasys at current levels.

Disclosure: No position in the stocks mentioned in this article.

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This article first appeared on GuruFocus.