Desktop Metal (NYSE:DM) has a 1-year performance of -84.5% and has already incurred losses of approximately 18% year-to-date. To say outlook doesn’t look great for DM stock is an understatement.
If you are wondering why this is happening, I can sum it up in three succinct reasons: a bad business model, money loss and poor fundamentals. Being bullish on DM stock right now is a fool’s errand as they lack any credibility based on their financial performance. Let me explain further.
The Fundamentals Behind DM Stock
Desktop Metal is a 3D printing firm that “exists to make metal 3D printing and carbon fiber 3D printing accessible to all engineers, designers, and manufacturers.”
First thing’s first — is there potential in Desktop Metal’s business prospects? Judging by a recent press release that “the company has received a $7.9 million order for binder jet additive manufacturing systems from a major German car maker for the mass production of metal automotive powertrain components at scale” and a report that the “global 3D printing market is expected to grow from USD 12.6 billion in 2021 to USD 34.8 billion by 2026, at a CAGR of 22.5%,” business prospects look bright.
On the other hand, when the company itself states that it has a growing customer base in a variety of industries, such as automotive, healthcare and dental, consumer products, aerospace, and more, investors should have high expectations about revenue generation and profitability.
This is far from true for this penny stock. Net income went from a loss of $103.6 million in 2019 to a loss of only $34 million in 2020, back up to a new high of $138.2 TTM. Some may say this is simply a bullish case for bottom fishing. The next financial metrics say otherwise.
Desktop Metal is not only plunging in income, but it also has a cash burn problem too. In 2020 it reported a negative free cash flow of $82 million and on a TTM basis, this figure has increased to a negative figure of $157 million.
Third-quarter 2021 financial results yielded mixed results.
“During the third quarter, we delivered solid financial performance underscored by sequential top-line growth of 34% and more than a 180 basis point sequential increase in our gross margins as we continue to gain scale,” said Ric Fulop, Founder, and CEO of Desktop Metal.
The gross margin reported was 16%, revenue growth of 34% compared to the second quarter of 2021, and 907% year-over-year from the third quarter of 2020. With a revised estimate of revenue in the range of $92-$102 million, the company trades at a price-to-sales ratio of 15.71x its TTM revenue based on its market capitalization of $1.28 billion. This is too expensive.
The net loss widened to $66.87 million versus a net loss of $19.46 million in Q3 2020. Operating expenses surged, and the same is true for the operating loss.
A company in most cases should be making an operating profit to deliver a net profit. I am concerned about the stock dilution problem too. In Q3 2020 Desktop Metal had 159,968,300 of weighted average shares outstanding, basic, and diluted. This number grew approximately 63% to reach 260,555,655 in Q3 2021.
Another SPAC Sad Story
Desktop Metal went public in December 2020 through a special purpose acquisition company (SPAC) merger with a SPAC called Trine Acquisition. The stock has a 52-week range of $3.25 – $34.9400. Personally, I believe the vast majority of companies going public via SPACs should not raise funds or achieve public company status based on weak fundamentals. It is a loophole the SEC should reconsider addressing.
The firm has seen its revenue-per-share in decline over the past 12 months. On a TTM basis, the figures of -303.56% and -21.63% for net margin and return on equity respectively are dismal. Operating cash flow is also negative. The capital expenditures as a percentage of sales on a TTM basis is about 40%.
This is too high and indicates the company is investing heavily in developing its technology, but the results are not fruitful yet. It may well be the case that Desktop Metal will continue to burn cash, which is not an ideal scenario for a rebound in its stock price.
Bottom Line on DM Stock
Trying to find positive factors based on pure fundamentals is hard to justify. The sales growth reported in Q3 2021 was overshadowed by a widening net loss.
There are other penny stocks to consider now for growth and value. Desktop Metal does not fit in any of these categories. Avoid it now as it is highly speculative. Poor financial performance has been correctly reflected in the stock price.
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On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.