Desktop Metal: Getting Crushed (NYSE:DM)

Desktop Metal (NYSE:DM) is a company involved in 3D printing that we have traded long and short several times, and it has seen its stock get crushed in 2022, along with just about all innovative stocks that do not make money on the bottom line. This company is working diligently to improve the efficiency of 3D printing with the idea of bringing it to scale. There have been recent wins like FDA approval for some dentistry applications. If Desktop Metal can deliver more wins like this, the company has the potential to experience massive growth over the course of the decade. The company has huge addressable market opportunities.

There is a ton of revenue growth here but that is not on the decline, at least, the pace of the growth is slowing. We love that the company has made a ton of strategic moves to expand its business. It is a really ‘cool’ company to be honest, but as a stock it has been horrendous. Investors have been crushed. Traders have done well long and short. We can understand why speculative investors might want to put money to work with a multi-year horizon at these levels, but it is a risk. The company just reported a poor set of earnings, and the outlook is even worse. This is about to be a dollar stock.

Operationally, the company is working to move toward its goals, but the growth path has been in question. There are no earnings, only revenues. But this is a speculative name.

Top line has huge growth, but it is slowing

A lot of the moves the company has made have led to record top line growth. This is definitely welcomed news for the bulls. The massive year-over-year revenue growth is impressive. The just reported third quarter was a top and bottom line miss versus consensus estimates. The company missed badly actually. This comes as the company reported yet another quarter of top line strength with the highest quarterly revenue for Q3 for the company. Revenue was $47.1 million, which is strong year-over-year growth of over 85% but it was a sequential decline from $57.7 million in Q2. Organic growth and acquisitions led to the growth, but missed estimates by $13.2.

Keep in mind this stock is expensive even at $2 a share, the company had to deliver beats to get some momentum. But instead the company whiffed on both the top and bottom line. Folks, companies that lose money are out of favor. Simple as that. If they cannot deliver on key metric growth that surpasses estimates it is considered disappointing. Stocks of companies that lose money have been obliterated. So what is going on with the earnings potential here?

Desktop Metal margins and earnings

Make no mistake, all of the strides the company has made to penetrate new markets and take share are strong, and revenues are still growing tremendously, but that growth rate is down for sure. The issue is because this is an up-and-coming company, they are spending a ton of money to grow. As such, this company does not make a profit. Gross margins were a loss, -0.7%. On an adjusted basis, gross margins were 19.9%. This is down significantly from the sequential quarters’ near 27%. Not good.

This is a plus. But losses are mounting. The company had a net loss of $60.8 million, and an adjusted net loss of $33.1 million. On top of that, adjusted EBITDA was negative $28.5 million, wider than $27.5 million in Q2. Ouch. This was also a larger adjusted EBITDA loss of $26.0 million a year ago. The company lost $0.19 per share this quarter, and this whiffed on expectations by $0.05. This was a poor result, but the guidance was worse.

Outlook poor for Q4

Folks, the outlook was well below expectations. The revenues are seen coming in at $51 to $62 million for Q4, which is about 30% less than what was expected. That hurts. The company also lowered the full year outlook for revenue, to still grow 78 to 87% from 2021 and come in between $200 and $210 million. The problem is that this is also well beneath the annual growth that was expected earlier in the year. And adjusted EBITDA will also have losses, somewhere between a loss of $20 and $26 million which means when combined with the poor Q3 results, adjusted EBITDA will be a loss of $117 to $123 million. As the company loses money, cash burn is a concern

Cash position on the decline

So revenue is still growing and that is great, but pressured margins are not great. Ongoing losses are tough, but the long-term debt is minimal which is good. Cash and equivalents were down about $40 million from Q2, coming in at $217.3 million. We have to say, losses are widening and with cash getting burned, the company could need to raise more money, diluting shareholders further, pressuring the stock even more. The biggest issue is that any new debt would come with a high rate, and high interest expense. Back in May the company did a $115 million notes offering, so cash is good right now, but the burn at this point could lead to cash running out by this time next year. However, we are not overly concerned with liquidity.

Desktop Metal ended the quarter with $255.7 million in cash, cash equivalents, and short-term investments. Cash will be sufficient to keep operations going well into 2023. The company has strong liquidity.

Final thoughts on Desktop Metal

It is hard to argue that this quarterly report was pretty weak. The outlook was well below expectations. Times are tough on a lot of innovative companies. The stock has been falling all year, with a few weeks of nice growth. This is a good trading stock long and short, but it is now looking like this is heading to a $1 stock again. The market is tough. Growth, while massive, has slowed a lot. The addressable market is huge, but the company is losing money and burning cash. Buying the stock is speculative, but could provide huge returns in a short time period, and even more long term, but this is high risk. Future debt will come at a high price tag. We love the company, but it is a tough investment here.