Wednesday, October 5, 2011

Stratasys ( Nasdaq - SSYS ) -- Wait 'till Next Year

Stratasys (SSYS $18.50) appears on track to report unspectacular Q3 results.  In 2010 the company formed a joint marketing relationship with Hewlett Packard in the expectation the larger company would quickly expand distribution of Statasys's 3-D printing systems.  Hewlett Packard is the leading producer of engineering tools and the company's rapid prototyping systems looked like a natural fit.  H-P rolled out its marketing effort in five minor European countries, but never expanded into more prominent foreign markets or the United States.  While that was going on Stratasys abandoned its own program of recruiting independent distributors.  The company did build up its sales efforts for larger production units.  But the lack of contribution from Hewlett Packard left overall results short of potential.

This summer Stratasys threw in the towel and reinstituted its own U.S. sales efforts.  The company hit the ground running and has been successful at recruiting new distributors.  But it takes time to train those people and get their sales efforts up to speed.  So the lull in reported results is likely to continue through the end of 2011, perhaps a bit into 2012.  Growing economic headwinds are presenting an additional hurdle.  Our estimates are unchanged although a somewhat lower performance is possible.

The long term outlook remains bright.  The H-P snafu cost Stratasys some time.  But the company kept up its R&D efforts and remains the technology leader by a wide margin.  The direct digital manufacturing industry remains in an early stage of development.  The potential market is enormous.  Direct competition remains scant.  Professors, students, engineers, and entrepreneurs all are using the company's technology to leverage their innovations.  Large corporations are testing it out, as well.  The idea is to make one off products just as cost effectively as mass produced parts.  Stratasys already has gotten pretty effective using a variety of plastics.  The company now is adding more materials as inputs.  It's also making the machines easier to use, more directly compatible with CAD/CAM software programs, faster, and less expensive.  The technology will remain in the hands of engineers for the foreseeable future.  Someday, though, it could become possible for consumers to design whatever product they want using their own computer.  Stratasys has some short term problems but it's ultimate business potential remains unusually high.

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