DM - Desktop Metal: It's Over

2023-11-15 19:30:53 ET

Summary

• The stock is plummeting and investors should avoid it, as the company's execution has been lacking and its Q3 results were disappointing.
• The company's revenue is falling year-over-year, but its aggressive cost-cutting campaign may help achieve breakeven EBITDA for Q4.
• Desktop Metal has revised its outlook for 2023, expecting year-over-year declines in revenue and adjusted EBITDA, and a cash raise may be necessary in 2024.
• Could there be a reverse stock split which could lead to further selling?

Desktop Metal, Inc. (NYSE: DM ) is a 3D printing company that we have traded long and short several times. We turned pretty negative on it earlier this year and we called it " dead money ." The stock is falling of a cliff now, and we think you should avoid this name. Stay away. Over 30% short interest can open up some trading opportunities for squeezes, but its over here. The just reported quarter kind of cemented our negativity. If you follow the company then you know there are profitable swings but investors have been crushed. For the buy and hold investor, this is pretty much a wipe out. Make no mistake, you can expect a reverse stock split in the future, and the selloff is likely to continue. Execution has lacked, and the pretty tough results in the just reported Q3, there is just no reason to own this stock. If you are long, we are rooting for you, and frankly rooting for the company, but we would not invest in it. We might come in for a short-term long trade if opportunity presented itself for our investing group, but the short-side bias has won out here. We think the pain continues and a reverse split will help keep the stock listed. When that happens, it is likely to continue its downtrend. As an investment, we think it's over here. It is now just speculation to go long.

Top line misses horribly

Folks, this was not a good quarter. On top of that we have had an amazing market rally and Desktop Metal has largely sat out, as the stock is down about 10% since the October 27th market low. A lot of the moves the company has made have led to record top line growth over the years, but revenue is now falling year-over-year.

In the past, this stock attracted a lot of investors as the year-over-year revenue growth was astounding. And not just two years later, sales are falling. The just-reported third quarter was a top line beat and a massive bottom line miss versus consensus estimates . Sales were expected to be around flat from last year. Revenue was just $42.8 million, which was a decline of 9.2% year-over-year. It was also down over $10 million from the sequential Q2.

Desktop Metal margins and earnings

While the company continues to lose money, it has taken on an aggressive cost-cutting campaign and one positive here is that the company expects breakeven EBITDA for Q4, though for the year, expects losses. All of this comes as management has made strategic moves to infiltrate new markets and take market share, but the growth is over. Now, years down the road we could see a different company, as they are spending a ton of money to grow, and with the competition in the space, the combination with Stratsys and other acquisitions had been made to fuel growth, though we saw the Stratasys deal die . But it has been painful and we just do not see an investment proposition here. Instead, we think it is a speculative bet if you are going long here. It is a bet on a complete turnaround, frankly.

Now, the company has completed a $100 million cost cutting campaign. This is a positive. Yet margins are still mixed, though we did see year-over-year adjusted margin improvement. GAAP gross margin was just 4.5% while adjusted gross margin increased 190 basis points to 21.9%. Margin expansion is positive. Now it is interesting here in that EBITDA is improving on the cost cutting campaign. We also expect operating cash flow will improve for Desktop Metal moving forward. While the company had a net loss of $24.3 million adjusted, adjusted EBITDA was negative $20.5 million, improving from an EBITDA loss of $28.2 million in Q3 2022. That is a notable positive. Still, the company lost $0.14 per share this quarter, and this was a moderately sized miss on expectations by $0.03.

Outlook cut for 2023

Coming into this quarter, revenues were seen coming in at somewhere in the $210 to $260 million on the high end for 2023. That would have been minimal growth to growth of 25% for the year. However, with year-to-date performance and Q4 expectations, the company lowered its expectation to between $187 to $207 million for full year 2023. In other words, year-over-year declines. The company also revised its adjusted EBITDA expectation of losses of $50 to $70 million for full year 2023. The one positive is that the company looks to get to adjusted EBITDA breakeven before year end 2023. Now, keep in mind, cash, cash equivalents, and short-term investments were $108.2 million down $19.4 million in Q3. While there is minimal debt, with these losses, it is likely a cash raise will need to be done in 2024. The company has burned about $150 million over the past 4 quarters.

Final thoughts on Desktop Metal

The company is struggling. The company noted weakness in demand and the sector. While that may be temporary, and the company is cutting costs where it can to get to EBITDA breakeven on the back of margin expansion, the revenues do not seem like they will inflect much higher anytime soon. Cash should fund operations through 2024 but a cash raise is likely to be needed. And with current trading trends, the company will likely need to reverse split the stock to stay listed in the future.

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