Is Stratasys, Ltd. (SSYS) a Buy?

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Shares of Stratasys, Ltd. (NASDAQ:SSYS) closed up nearly 6% Tuesday after jumping as much as 11% earlier in the day after the 3-D printing company posted better than expected first-quarter earnings.

Stratasys stock

Image Source: Stratasys

Meanwhile, fellow additive manufacturing specialists 3D Systems Corporation (NYSE:DDD) and ExOne Co (NASDAQ:XONE) also came along for the ride yesterday, closing up 4% and almost 10%, respectively. Unfortunately, ExOne Co (NASDAQ:XONE) itself fell more than 12% in after-hours trading yesterday after missing quarterly earnings expectations, predictably dragging all three companies down with it so far in today’s trading.

With shares of Stratasys, Ltd. (NASDAQ:SSYS) up nearly 30% over the past three months, however, now’s a great time to dig in and see if this 3-D printing stock could possibly still be a buy.

The numbers
On one hand, Stratasys, Ltd. (NASDAQ:SSYS) turned in GAAP revenue of $97.2 million, which actually missed analysts’ estimates for sales of $98.4 million on the same basis. Even so, that number still represents a 116% rise from the $45 million in GAAP sales Stratasys achieved during the same year-ago period.

Meanwhile, non-GAAP revenue — which excludes the effect of certain amortization expenses related to the recently closed Objet merger — came in at $98.2 million. For those of you keeping track, that reflects organic growth of 18%. Of course, that didn’t beat the 22.1% organic growth posted by 3D Systems in its most recent quarter, but it’s an impressive result nonetheless.

Adjusted net income, on the other hand, rose 40% to $17.6 million, or $0.43 per diluted share, handily beating analysts’ expectations for earnings of $0.37 per share. In addition, and once again thanks largely to costs associated with the merger, Stratasys’ GAAP loss per share increased to $0.40 from a loss of $0.23 during the first quarter last year.

Going forward, management reiterated previous full-year 2013 guidance, telling investors that they still expect revenue to come in between $430 million and $445 million, with non-GAAP earnings per share between $1.80 and $1.90. Finally, Stratasys, Ltd. (NASDAQ:SSYS)’ GAAP loss per share is still expected to be somewhere between $0.41 and $0.16.

So why buy?
Let’s get this straight: While Stratasys, Ltd. (NASDAQ:SSYS) managed to beat estimates for net income, it missed on revenue and still projects a GAAP loss per share when all is said and done in 2013. Why, again, does Mr. Market believe the stock is worth paying more than 250 times trailing earnings?

Well, as my Foolish colleague Brian Pacampara pointed out yesterday, Stratasys, Ltd. (NASDAQ:SSYS)’ forward P/E is still rich, but much more palatable at 40. And remember, for better or worse, the stock market is generally a forward-looking machine. And while the market isn’t always perfectly efficient, it’s important to note Stratasys’ GAAP losses won’t last forever. More specifically, until all those merger-related integration expenses inevitably pass, Stratasys’ sky-high trailing price to earnings ratio won’t be a useful valuation metric — hence the focus on non-GAAP earnings to give investors a better idea of how the company is really doing absent those costs.

In addition, thanks to the merger, remember I previously wrote the folks at Stratasys were looking forward to leveraging their new “global network of more than 260 resellers and independent sales agents that sell Stratasys products and services worldwide.” Sure enough, according to the company’s earnings press release, they’ve already finished training the most significant 112 of those channel partners, “representing approximately 80% of the Company’s potential worldwide revenue.”

What’s more, Stratasys spent $10.8 million on R&D last quarter, or around 11% of sales, which reassured investors that the high-tech company isn’t resting on its laurels.

Finally, on another interesting note, Stratasys also launched the first 3-D printer “designed especially for smaller orthodontic labs and clinics”, the Objet30 OrthoDesk. In fact, Stratasys is using the relatively compact printer to make a huge push to revolutionize the world of digital orthodontics:

Of course, this is only one niche market in which Stratasys is involved, but it perfectly illustrates why management felt confident in the earnings conference call saying that their long-term target operating model includes maintaining annual revenue growth of at least 20%, with non-GAAP net income as a percentage of sales between 16% and 21%.

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