3 Reasons SSYS is Risky and 1 Stock to Buy Instead

Over the past six months, Stratasys’s stock price fell to $10.95. Shareholders have lost 14.8% of their capital, which is disappointing considering the S&P 500 has climbed by 3.6%. This may have investors wondering how to approach the situation.

Is now the time to buy Stratasys, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Stratasys Will Underperform?

Even with the cheaper entry price, we don't have much confidence in Stratasys. Here are three reasons why SSYS doesn't excite us and a stock we'd rather own.

1. Revenue Spiraling Downwards

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Stratasys’s demand was weak over the last five years as its sales fell at a 1.7% annual rate. This wasn’t a great result and is a sign of poor business quality.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Stratasys, its EPS declined by 13.6% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

3. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

While Stratasys posted positive free cash flow this quarter, the broader story hasn’t been so clean. Stratasys’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 4.8%, meaning it lit $4.80 of cash on fire for every $100 in revenue.

Final Judgment

Stratasys doesn’t pass our quality test. Following the recent decline, the stock trades at 34.6× forward P/E (or $10.95 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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