Given its performance in recent weeks, you may think Desktop Metal (NYSE:DM) is making a comeback. On May 10, DM stock fell a staggering 61.1%, but in the weeks that followed, it experienced an epic bounce back.
Shares in the additive manufacturing (also known as 3D printing) play nearly doubled in price. However, it’s becoming more clear that this was little more than a “dead cat bounce.” Knocked down so much from its past highs, it wasn’t out of line for the stock to see an outsized, short-lived rebound.
If you got into it right after its post-earnings plunge, you may have made a fast profit. Those still holding it should sell, ASAP. If you haven’t bought it yet, my take is simple: Avoid at all costs. Even as it has dropped so far from its all-time high ($33.50 per share), downside risk remains massive.
DM Stock and Its Recent Roller Coaster Moves
Desktop Metal shares have sunk and soared since May. First, the sinking. The stock tanked on May 10, for two reasons. First, a poorly received earnings report. For the quarter ending March 31, the company reported high revenue growth, but much of this was due to increased revenue from its acquisition of Ex-One. Worse yet, it reported losses per share (22 cents) wider than analyst expectations.
Second, it announced plans for a $100 million convertible debt offering. This also put pressure on DM stock, as it signaled shareholder dilution was on the way. The convertible debt offering is not surprising.
The 3D printing company reiterated its outlook, calling for high losses in 2022. More losses ahead raises the need to raise more cash. In short, it made sense that the stock tumbled to a new all-time low ($1.26 per share).
Again, its recent rebound from this low (to as much as $2.42 per share) made sense as well, yet only in the sense that it was a “dead cat bounce” — a temporary recovery. With its move back to around $2 per share, this bounce back has already started to revert. Forget about the stock zooming back to higher prices.
Misperceptions About Desktop Metal’s Low Stock Price
On occasion, there are opportunities to be found among low-priced stocks. Put simply, DM stock isn’t one of them. Investors may find it appealing today, as it trades firmly in penny stock territory, but chances are they like it for all the wrong reasons.
They may like Desktop Metal at around $2 per share, under the perception that this low stock price makes it cheap. Yet while it trades for nearly 94% below its all-time high, this doesn’t mean shares are a bargain. Despite its lack of profitability, one may think it’s cheap, given it trades at a 44% discount to its book value.
However, on a tangible book value basis (excluding intangible assets like goodwill), it trades at a high premium to book value. Not only that, considering the upcoming cash burn, much of its cash position ($206.5 million) will be depleted, further lowering book value.
Also, bullish investors may like it, under the perception that it has a favorable risk-to-return proposition. Unfortunately, until it makes progress solving its profitability issue, its upside potential is murky. As for downside? Despite the low stock price, it’s much higher than it may seem at first glance.
The Verdict on DM Stock
The sell-side has already lowered forecasts for its next earnings report. Chances are, Desktop Metal delivers similarly bad results in its next release. Between now and then, shares could give back more of their “dead cat bounce” gains. If market volatility picks back up, it could re-hit its all-time low sooner than you think.
Also, assuming the convertible debt is converted into common stock, the resultant dilution could push the stock to new lows. Add in the prospect of high losses in 2023, before it (possibly) gets out of the red in 2024, and another high double-digit plunge isn’t out of the question.
Speaking of a possible flip to profitability, it’s hard to be confident. Unless there’s a management change, an eventual walking back of these projections would come as no surprise.
It’s best to avoid DM stock as it lies in the penny stock graveyard alongside other busted growth stories.
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On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.