DM - Desktop Metal: Dead Money

2023-08-04 12:30:36 ET

Summary

• Desktop Metal, Inc. has experienced stagnant stock performance and is better suited for trading rather than long-term investment.
• The company's revenue growth has slowed and is now declining year-over-year, despite strategic moves to expand its business.
• The company reported a top line beat but a bottom line miss, with losses mounting and an outlook that could lead to no growth in sales in 2023 versus 2022.
• The combined company should have synergy, but this can still be traded ahead of the combination.

Desktop Metal, Inc. ( DM ) is a company involved in 3D printing that we have traded long and short several times, but for the most part has gone absolutely nowhere. It is, as we investors say, "dead money." Instead, it is much better served for trading. It is the type of stock that you can trade long and short and scalp nickels and dimes for some serious profit, if you have the patience and discipline to stick to a strategy.

With that said, there have been some very profitable swings in Desktop Metal, but investors just have not done well here. Buy and hold has not worked, but trading has led to substantial gains. As an investment, we remain neutral at the current pricing. This company long had tremendous revenue growth, however that pace of the growth is slowing. We love that the company has made a ton of strategic moves to expand its business, yet so far, the stock really has not been able to find substantial footing to the upside, in part due to fundamentals that have softened.

Make no mistake it is an innovative company, but it is not making money. The company just reported another mixed quarter and we wanted to check in on the stock, which remains without earnings, only revenues. And now those revenues are falling This is a speculative name, although keep in mind, they have the deal to combine with Stratasys Ltd. ( SSYS ), so the trading range will be narrow, but you can make good money like that.

Top line pressures

A lot of the moves the company has made have led to record top line growth over the years, but revenue is falling year-over-year. It is just not good enough. The year-over-year revenue growth had been very impressive but started cooling a year ago, and now, has declined. The just-reported second quarter was a top line beat and a bottom line miss versus consensus estimates . So it was expected sales would fall. Revenue was $53.3 million, which was a decline of 7.6% year-over-year. Organic growth and acquisitions had previously led to the growth we were accustomed to.

Desktop Metal margins and earnings

While the company continues to lose money, it has taken on an aggressive cost-cutting campaign. This comes as management has made strategic moves to penetrate new markets and take share, but the growth has fizzled here. While this is still a younger company, they are spending a ton of money to grow, and with the competition in the space, the combination with Stratsys, in our opinion, is a net positive. While valuation of the deal is questionable, we think it is a long-term positive as this company does not make a profit. Gross margins were a a positive 11%. On an adjusted basis, gross margins were 31%. This is wildly positive as margins expanded significantly, while EBITDA was at its highest ever here in Q2, though still losing money

While the company had a net loss of $19.3 million adjusted, adjusted EBITDA was negative $15 million, improving from an EBITDA loss of $27.5 million in Q2 2022. That is positive. Still, the company lost $0.15 per share this quarter, and this whiffed on expectations by $0.05.

Outlook for 2023

The revenues are seen coming in at $210 to $260 million for 2023. This would be minimal growth to growth of 25%. Even at the highest end, this is well beneath the annual growth that the company previously registered. 2022 revenues were up 86% from 2021. Now, it is possible there is no growth at the low end. And adjusted EBITDA will also have losses, somewhere between a loss of $25 and $50 million, which means cash burn is a concern.

Cash position on the decline

So while there is an all-stock deal with Stratasys, the individual company metrics still matter. Here in Q2, DM has revenue that is falling, EBITDA that lost less than ever, as margins were better, but continues to lose money and burn cash. The long-term debt is minimal, which is good. Cash and equivalents were down about $22 million from Q1, coming in at $127.6 million. The company has burned over $130 million over the past 3 quarters.

Final thoughts on Desktop Metal

It is hard to argue that this Desktop Metal, Inc. quarterly report was pretty weak. The company is struggling.

The combination with Stratasys should provide synergies. It is an all-stock deal for $1.8 billion. This deal should close in the fourth quarter. Desktop Metal shareholders will receive 0.123 ordinary shares of Stratasys for each share of Desktop Metal Class A common stock. Desktop shareholders will own approximately 41% of the combined company, and existing Stratasys shareholders will own approximately 59%.

The Desktop Metal, Inc. cash burn is eye-popping. We like the margin expansion, but the stalling of revenue growth is a concern. We still think you can trade this for some moves ahead of the deal being finalized, but investing here has been a failed endeavor.

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