Desktop Metal (NYSE:DM) has not yet produced its fourth quarter earnings and full-year 2021 financials. But investors should probably expect some volatility in DM stock as it is likely to produce more losses. This won’t likely help Desktop very much even though it is still building its additive manufacturing business.
The sad fact is that DM stock has cratered ever since it released the third quarter earnings report with massive losses on Nov. 15. For example, on Nov. 8, Desktop Metal peaked at $9.20 per share. But by Jan. 27, 2022, it was down to $3.51.
As of Feb. 23, it is up slightly at $3.66, but this still represents a massive decline of over 60% in just three months. That is a massive destruction of value in a very short period of time.
Where Things Stand With Desktop Metal
In Q3 Desktop Metal produced $25.4 million in revenue and had a 15.5% gross margin. This was much better than its second quarter revenue of $19 million and a gross margin of 12.5%.
But that is about where the good news ends. In both quarters Desktop Metal produced massive losses. In Q2 it lost $47.5 million before tax benefits and in Q3 it lost $67.4 million before tax benefits.
Moreover, in the last nine months to Sept. 30, it has produced a negative $201.9 million before tax benefits of $32.8 million.
On top of this, the company’s free cash flow (FCF) situation is just as dire. As you know, FCF includes just the cash losses by adding back non-cash expenses and spending. But it also includes cash outflows from working capital and capital expenditures – both real cash costs not picked up in the income statement.
The Cash Flow Statement in the 10-Q filing shows that it burned through $110 million in operating cash outflow and $4.15 million in capital expenditure (capex) spending. This means its 9-month FCF was negative $114 million, $41 million over Q2.
So Desktop is burning $41 million per quarter even though its revenue was just $25 million. This is unsustainable, as it lowers the cash balance.
As of Sept. 30, Desktop Metal had $424 million cash and investments. Burning $41 million a quarter works out to $164/yr or 39% of the total. This means it can only do this for two more years.
Where This Leaves DM Stock
Right now analysts are still positive on DM stock. They believe it will lower operating expenses below revenue. But that may take a good while to occur.
Reviewing six analysts surveyed by Seeking Alpha shows the average price target is $9.75 per share. But this is down substantially in the last three months. On Nov. 12, the target was $20 from these same analysts.
In other words, if the Desktop Metal produces further losses, it seems highly likely that the average price target could fall much further again. Analysts will see these losses continuing ad infinitum.
For example, analysts now expect an average of $46.5 million in Q4 revenue, according to Yahoo Finance, which uses Refinitiv analyst survey data. This is from a survey of six analysts. However, their estimate of a loss of nine cents per share works out to an average of $28 million in net income loss for Q4.
That means further cash outflow for the company and likely a further drop in average price targets. The astute investor will probably do better simply waiting for the company to become profitable before investing.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.