VLD - Desktop Metal: A Premium Price Is Deserving After Recent Earnings

2023-03-09 07:10:43 ET

Summary

• Desktop Metal is much more than a single ExOne business segment.
• Recent earnings were good and outlook is better.
• Live Suite is a consolidation of software to improve margins.
• It's better to water your flower than cut it.

Total Addressable Market

In my recent articles about Desktop Metal ( DM ), I've been valuing them as if the only useful business segment is ExOne. I also only considered the sand binder technology segment impacting a $50 Billion US foundry Industry prediction.

If one thing is certain after recent earnings, we can rest assured that Desktop Metal is much more than a single ExOne business segment. In fact, DM believes they can be a part of addressable markets totaling $790 billion plus. This includes a core business focused on mass production through Binder Jetting and Photopolymers as well as growth opportunities in Foams, Sheet Metal Forming, and Printed Hydraulics.

Financial Highlights and other Achievements

Desktop metal shocked expectations by delivering a full year revenue surprise of $209.02M versus an estimate of $203.23M. They also delivered a full year EPS of (-0.42) versus an estimated (-0.43). Gross margin was 22.5% and adjusted EBITDA $(-118.4)M.

Furthermore, key recent business achievements were highlighted including scaling through ExOne integration, installing 1,100 metal additive manufacturing metal systems, and partnership with Align Technology. They also highlighted many different product releases, and cost reduction strategies.

One of the topics leading stockholder excitement was Ric's comments on a master supply agreement with one of the largest consumer electronic companies in the world.

Ric was asked about this from an analyst, but he proceeded to inform this agreement is legally binding, and he is not allowed to disclose the details. There are rumors going around which exact company this is, but the only thing I will add is - an agreement with any of the "world's largest consumer electronic companies" is a bullish signal.

2023 Financial Outlook

Key planning assumptions were made on the conservative side of $210 - $260 million in Revenue and $(-50) - $(-25) million in Adj. EBITDA. They also prescribed a weak Q1'23 based on historical seasonal trends.

Jason Cole, Desktop Metal's CFO, even helped an analyst model by giving figures of EBITDA breakeven by the end of the year. He said it would be possible to breakeven if they perform on the high side of $60M a quarter in revenue in 2023.

Live Suite

Desktop Metal also announced a consolidation of software through their Live Suite Software Hub . As described by Desktop Metal, this is an End-to-End Software Hub that delivers generative AI solution for Additive manufacturing 2.0. It includes a package of software programs that allows users of Desktop Metal, Desktop Health, ETEC and ExOne 3D printing systems to seamlessly manage their build preparation, printers, accessories, and processes with success in one cloud-based location. Merging these platforms should help Desktop Metal should help improve margins.

Valuation

DM is clearly not as juicy of a buy as it was around $1.50, but there is still room to add more. In my first article, I was a happy buyer at anything under $2.50, however recent news has shown DM is very serious about their path to success. They currently reside around a 3.3 EV/Sales, which trades at a slight premium compared to ( DDD ), ( SSYS ), and is still extremely undervalued compared to ( VLD ).

As Peter Lynch would say, let's ensure we are not cutting our flowers and watering our weeds. Just because DM is approaching our original fair value, based on information provided, does not mean it's time to sell or hold. DM is making very serious moves towards the additive manufacturing industry. And with the success of other segments, it's clear the total addressable market has expanded far beyond ExOne, thus our valuation should increase. I am weary of anything over a 7 EV/Sales based on industry valuations, but I will continue to water my flower until we approach this. If further information is dispelling this thesis, then we will adjust, but for now, anything under $5 seems reasonable, based on industry valuations and the nature of Binder Jet technology deserving a premium over others - due to speed and Moore's law capabilities.

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