Desktop Metal Stock: Hyper Growth Additive Manufacturing Co. (NYSE:DM)


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Investment Thesis

Desktop Metal (NYSE:DM), an additive manufacturing company went public last year through a SPAC merger with Trine Acquisition Corp. The company’s share price shot up from $10 to over $40 amid the SPAC craze. As the Hype fades and investors are dumping high-growth stocks, the stock is now down over 90% from its all-time high.

Desktop Metal is the latest company trying to take additive manufacturing mainstream by providing mass production capabilities. The company was founded in 2015 with a mission to make 3D printing an essential tool for engineers and manufacturers around the world. Additive manufacturing (or 3D printing) has always been around, in fact back in the 1980s people are already considering using 3D printing to manufacture prototypes.

However, 3D printing never made it to the mainstream manufacturing industry due to its price and lack of capability to mass-produce. Now with 3D printers being a lot cheaper, Desktop Metal is taking on the challenge to produce a printer that can help companies mass-produce parts.

I believe the company has a huge potential as the additive manufacturing market is huge. If its technology is really capable of what it claims to do then it is able to disrupt a lot of industries by providing a next-gen printer. The company is also showing strong growth while trading at a cheap valuation. There are still skepticism around its technology and profitability remains an issue but I think the reward outweighs the risks. Therefore I rate the company as a buy at the current price.

Desktop Metal

Desktop Metal

Market Opportunity

The TAM (total addressable market) for Desktop Metal is huge. According to the company, the additive manufacturing market is estimated to grow over 11 times from $12B to $146B by 2030, driven by the shift from prototyping to mass production applications. More and more traditional manufacturers are seeking ways to reduce cost and increase efficiency which increases the demand and adoption of 3D printing solutions. For instance, Rocket Lab (RKLB) is now using 3D printing solutions to manufacture the parts for its rockets. Unlike previous 3D printing solutions, Desktop Metal is able to print products with different materials like ceramic, wood, sand, polymers, and more. Its expansive material library allows them to also expand its footprint into the new industries like dental and jewelry, which open ups more growth opportunities going forward.

Ric Fulop, CEO, on the company’s portfolio

Today, we have 20 market leading print platforms with a focus on high volume production of end-use parts. Our platform support a compelling portfolio of diverse materials, including metals, polymers, composites, sands, woods and elastomers, amongst many others. These materials we have added help us address a growing array of end-use applications and have increased our prices in key verticals adopting additives, such as dental, healthcare, foundries, and automotive name a few.

Desktop Metal

Desktop Metal

Broad Product Portfolio

Desktop Metal currently offers a broad portfolio with multiple products catered to different needs. This includes Studio System, Shop System, X-Series, Fiber, and the Production System. It also has three subsidiaries under its brand which are Desktop Health, ETEC, and ExOne. The wide range of product capabilities allows the company to work in multiple industries such as energy, aerospace, dental, and military.

Studio System and Shop System

Studio System is an office-friendly metal 3D printing that allows employees, designers, and engineers to print 3D metal parts easily. The process from printing through sintering is automated, the software automatically scales the part, and orients it for print and sintering success. Shop System is designated for machine shops. The Shop System uses high binder quality jetting to cost-effectively 3D print end-use metal parts with unmatched speed and productivity. The printer is easy to use and operate and is able to handle mixed volume production, batch production, and mid-volume production.

X-Series and Fiber

The X-series consists of 3 binder jet 3D printers for different production volumes. It is able to print a variety of materials, including metals, ceramics, and composites. While Fiber is a printer that is designated for companies that want to print small amounts of parts that are made out of industrial-grade composites, featuring continuous carbon fiber and fiberglass tape. Parts are usually used in consumer electronics and automotive industries.

Production System and Subsidiaries

The Production System is designated for high-speed metal 3D printing for mass production. The system is designed to be the fastest way to 3D print the metal parts at scale. It can produce in a variety of metals and the quality of the parts produced is superb with densities up to or exceeding 99%. The three subsidiaries Desktop Health, ETEC, and ExOne also serve different purposes, respectively. Desktop Health focuses on bio-fabrication solutions for the healthcare industry, ETEC focuses on polymer 3D printing solutions and ExOne specializes in sand 3D printing.

Ric Fulop, CEO, on the company’s product

Over the past 18 months, our team has worked diligently to develop and bring to market a range of AM 2.0 metal platforms, which includes our flagship production system, the P-50. Added to that, we utilized our strong balance sheet to acquire a wide breadth of capabilities and technologies that greatly broaden our AM 2.0 portfolio and now provide us with a sustainable technology depreciation across a range of applications.

Desktop Metal

Desktop Metal

Why Desktop Metal

With all the products mentioned above, Desktop Metal is able to provide a wide range of solutions that cater to the different needs of different customers. The Production System’s mass production solutions speed up production 100x of the legacy technologies and provide a comprehensive portfolio across different materials beyond just metal. The system is able to combine speed, accuracy, and quality finishing with Single Pass Jetting. It is able to mass-produce and produce a layer in less than 3 seconds with its throughput up to 100,000sa year which no other company is capable of doing at the moment. It is also investing in pioneering technology such as 3D printing polymers with new systems. The production systems will only get more and more comprehensive over time and competitors will be hard to catch up with Desktop Metal’s technology.

Ric Fulop, CEO, on single pass jetting technology

We made solid progress in our production system platform as we continue to grow our installed base of customers leveraging our patent pending single pass jetting technology. This differentiated technology sets us apart in the industry in terms of speed and part costs and the customer response has been fantastic.

Desktop Metal

Desktop Metal

Financials and Valuation

Desktop Metal announced earnings for Q1 last month and it is demonstrating strong top-line growth. The company reported revenue of $43.7 million, up 286% YoY (year over year) from $11.3 million. Product revenue increased 289% from $10.3 million to $39.5 million while Service revenue increased 322% from $1 million to $4.2 million. The growth is largely attributed to the shipments of new products and contributions from acquisitions. Non-GAAP gross margins for the quarter were 17.1%, up over 1,150 basis points YoY from 5.5%. The company also confirmed guidance, expecting revenue of approximately $260 million for 2022, representing a growth of 131%.

Ric Fulop, CEO, on Q1 results

“We delivered strong topline growth of 286% year-over-year as we continue to capture market share and rapidly grow revenue at scale. With several exciting product launches to kick off the year, and demand as strong as ever for our broad portfolio of AM 2.0 solutions, we are well-positioned for outsized growth and margin expansion through the balance of 2022.”

Desktop Metal

Desktop Metal

However, the company is struggling with profitability. Operating loss for the quarter was $(69.5) million, which widened 126% YoY from a loss of $(30.7). Adjusted EBITDA loss was $(41.6) million, compared to $(19.4 ) million a year ago. The increase in loss is largely due to the heavy spending on R&D and S&M. R&D and S&M expenses alone now represent 56.3% and 45.1% of total revenue. Operating cash flow also decreased slightly from negative $(41.1) million to negative $(56.3) million. The company’s balance sheet remains healthy with $206 million in cash and only $26 million in debt, which provides a buffer for its significant cash burn.

It is hard to value the company as it is still in the early hyper-growth stage. As it has no profit and cash flow we can only value it using the PS ratio. After the significant drop in share price, Desktop Metal is now trading at an fwd PS ratio of 2.8. From the chart below, you can see that this is largely in line with its peers within the industry. However, from the second chart, you can also see that it is growing significantly faster than all of its peers. I believe a higher multiple should be warranted as it is posting triple-digit revenue growth while trading at a similar valuation to peers with little to no growth.

Chart
Chart

Risks

Some risks involve competition within the industry and headwinds from the macro environment. Despite being a large market, Additive manufacturing is a very competitive industry with a lot of players like 3D Systems (DDD), Proto Labs (PRLB), Stratasys (SSYS), Materialise (MTLS), Markforged (MKFG), and more. Each of these companies competes with Desktop Metal on different ends. For example, it competes with Materialise in the medical space and competes with Proto Labs in the prototyping space. One of my concerns is whether Desktop Metal is able to focus on different areas simultaneously and keep up with its competitors. The current macro environment may also post headwinds on the company. If inflation persists and the economy weakens, manufacturing activities may slow down which decreases the demand for Desktop Metal’s printers.

Conclusion

In conclusion, I believe Desktop Metal has a strong potential. The TAM for additive manufacturing is huge and is continuing to grow, which will provide tailwinds for the company going forward. Desktop Metal has built out a very strong product portfolio that is able to cater to different needs. Its wide range of capabilities and expansive material portfolio allow them to work in multiple industries which increases its reach. This also gives it a competitive edge when compared to its peers within the industry. Desktop Metal is showing strong top-line growth despite the tough macro environment we are in right now. As it continues to launch new printers, I believe it will be able to maintain a high revenue growth rate. The company is struggling with profitability but it is understandable as it is still investing heavily in R&D and S&M for future growth. The current valuation is also cheap when compared to peers as it is growing at a much faster rate. Therefore I believe Desktop Metal is a buy at the current price.

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