Apparently, investors seem to be quite bullish on 3D printing stocks of late. Such is the case with Nano Dimension Ltd. (NASDAQ:NNDM). Indeed, investors in NNDM stock who bought one year ago today and held steady have an 10-bagger on their hands. Not bad for a year’s worth of patience.
However, this is a stock that has experienced significant volatility of late.
It’s understandable. I mean, this is a company with only $3.4 million in revenue last year, but a market cap of $2 billion. It’s got an EV/Sales valuation of 432 over the past 12 months. For those bulls out there, its forward EV/Sales is a “mere” 294.
In other words, this is one heck of an expensive company. Investors are banking on outrageous growth from this play. Patient investors have done well with this stock this year. Accordingly, it appears there are many investors that are looking well down the road for growth, and are simply ignoring any near-term numbers that come in.
That said, there continues to be a large percentage of investors (like myself) who have trouble wrapping their heads around this valuation.
NNDM Stock Valuation a Problem for Fundamentals-Oriented Investors
Nano Dimension is about as pure of a play on growth as one can get in this market. Indeed, the company’s got everything retail growth investors want these days. It’s a company with a small market cap, a proprietary technology, and a market with tons of growth potential.
Just how fast is this market expected to grow? Well, some estimates have pegged industry growth at 255% over the next four years (2020-2024). That’s a compounded annual growth rate of more than 26%.
The thing is, investors are pricing in some really astronomical growth in this stock today. This company will need to grow substantially faster than the market rate to sustain this valuation over time.
It’s possible this company could have some pretty incredible growth on the horizon. However, in the absence of anything tangible at hand, investors are banking on the story right now with NNDM stock.
As Nano Dimension has stated in its previous earnings report, various estimates peg the total 3D printed electronics segment between $2.3 billion and $3.9 billion over the next few years. At the company’s current valuation, it’s valued as approximately equivalent to forward estimates of sales for the entire sector in 2029 (at the lower end of the range).
The company does have more than $1 billion in cash and cash equivalents on hand, so this reduces these valuation metrics substantially. However, even taking the company’s cash pile out of its valuation, I’m having a hard time making the numbers work in my models.
Maybe I’m missing something here, but the numbers don’t add up to me.
Earnings Report Provides Reason for Optimism
On March 11, Nano Dimension reported earnings to the cheer of investors. The stock jumped double-digits on what was initially viewed as some pretty decent results.
Indeed, the company’s revenue beat of nearly 50% ($1.97 million vs. consensus estimates of $1 million) raised some eyebrows. The company’s equity issuances resulted in a hefty cash balance of $1.5 billion. Additionally, the company’s got no debt, and plans to execute a capital spending program to boost product development, and M&A strategy moving forward. These are all good things.
However, since then, shares have sold off dramatically.
Why the sentiment shift?
Well, it appears the aforementioned issues investors might have with the company’s valuation have something to do with it. Perhaps some investors were concerned with the larger than expected loss. Additionally, it appears others are waiting for a clearer line of sight into what the company plans to do with all the cash it has on hand.
NNDM Stock: The Bottom Line
In my view, investors appear to be losing patience with this stock. Any company with a war chest the size of Nano Dimension that isn’t immediately using it to create shareholder value is being punished today.
The company’s CEO has bemoaned the valuations in this sector as a reason the company’s held off on making deals. I have to agree — I think the sector is very overvalued right now.
Accordingly, investors are stuck between a rock and a hard place with this one. On the one hand, you’ve got a growth company with a ton of cash sitting there. On the other, the company is finding it nearly impossible to do deals at prices that make sense.
In my view, investors should think like Nano Dimension’s CEO and avoid this sector right now. Prices are out of line, far above what is reasonable right now.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.