Desktop Metal (NYSE:DM) may have jumped on the reporting of its latest quarterly numbers. But don’t view this as a sign that, after months of severe price decline, it’s all uphill from here for DM stock.
A little over a year ago, this was a name very popular with investors. With additive manufacturing (aka 3D printing) becoming a fast growing industry, many saw DM as an opportunity to get in on the ground floor. Unfortunately, those still holding on to it since then have seen their shares crash to the ground floor.
Briefly trading for prices nearing $35 per share, it’s now trading for a little over a tenth of that, as it sits firmly in penny stock territory. As its earnings (despite the positive response) weren’t anything to write home about? This rally won’t last. Shares will instead pull back, and continue to slide lower, as the key reason (heavy losses/cash burn) behind its tremendous plunge in 2021 remains in play.
Sure, you can argue that with its cash and short-term investments, it has enough in the bank to sustain these losses. This may be true. Yet between this whittling down its undervalued value, and the growing tendency of the market to look past the hype, and value businesses more on their fundamentals, don’t let its low share price fool you. This “cheap stock” could get a whole lot cheaper in the months ahead.
DM Stock and Its Recent Earnings
On March 8, Desktop Metal reported numbers for the December quarter. Again, investors reacted favorably to the results. Mainly, because they focused on the top line (revenue) and not the bottom line (earnings).
Admittedly, Desktop’s revenue figures sound good on the surface. Sales for the quarter came in at $56.7 million. Even if you exclude the bump-up in revenue stemming from its acquisition of Ex-One, that’s still a 62% increase on a sequential (quarter-over-quarter) basis. To top things off, the company also guided for $260 million in revenue for 2022, a 131% increase from 2021.
With all this, it makes sense why DM stock spiked 11.6% on the news. But if you dig deeper into the financials, it’s clear that while this additive manufacturer has little problem growing its revenue, it’s still facing issues in another area: profitability. For the quarter, it reported a net loss of $71.2 million. Even on an adjusted EBITDA basis (which includes one-time expenses), losses came in at $25.7 million.
For the full year, total net losses came in at $240.3 million. Adjusted EBITDA losses for 2021 were $96.1 million. The guidance touting triple-digit percentage growth didn’t provide a range for expected net income/net losses. It did, though, provide an adjusted EBITDA estimate for 2022: losses of around $90 million. This signals it has a long way to go on its journey out of the red.
Further Destruction of Shareholder Value
After dropping nearly 90%, you may think the worst is over for DM stock. Technically, this may be accurate. Cash and short-term investments on hand may be enough to weather what could be years of additional losses, enabling it to keep the lights on and avoid Chapter 11.
If it manages to do this, another 90% drop may not be in store. Yet that doesn’t mean there’s little downside from today’s prices. Desktop Metal could easily experience another high double-digit decline. Why? So far, it has made zero progress addressing the profitability issue.
Instead, management is focused just on scaling up, preferring to worry about becoming profitable later. Now, last year, there wasn’t much issue going with this approach. At the time, external factors like its short-squeeze potential were more in focus than its fundamentals. With changes in the market, however, this has flipped completely.
Today, investors are no longer impressed with companies that can post high revenue, but spend more than 100% of that added revenue to receive it. They’ve become less willing to give these types of businesses premium price-to-sales (P/S) ratios. This has already happened of course with Desktop Metal, following its aforementioned drop. Still, this compression will carry on. At least, until shares reach a price that fully takes into account its chronic operating losses.
Bottom Line on DM Stock
Earning an “F” rating in my Portfolio Grader, if you’re on the prowl for low-priced stocks, you may see this name pop on your radar. Taking just a high level look at it, it may seem like a risky opportunity that’s well worth it (low price, high revenue growth).
But take a closer look, and you’ll see this isn’t a stock that has been irrationally oversold. DM stock belongs in the market’s graveyard. Failing to make headway with its key challenge (profitability), expect it to remain on its downward trajectory.
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.