Desktop Metal Stock and Additive Manufacturing 2.0
When the company that produces the world’s fastest metal 3D printers, Desktop Metal, announced their intentions to go public, shares of another metal 3D printing company, ExOne (XONE), soared. On the surface, this makes no sense. If ExOne’s competitor is successfully raising more capital to sell a superior metal 3D printer, shouldn’t that be bad news for ExOne?
The answer to this question may lie in Desktop Metal’s plans for “constructive consolidation,” something elaborated upon in the various artifacts made available to support their initial public offering (IPO). While your typical special purpose acquisition company (SPAC) reverse merger offers up little more than a forward-looking glossy investor deck, Desktop Metal has filed sufficient documentation for us to assess the value on offer. It may even provide some clues as to why shares of ExOne surged.
About Desktop Metal
If you’re not familiar with Desktop Metal, we published a piece on them last December titled “Desktop Metal 3D Printers Set to Disrupt Manufacturing.” Long story short, they’ve built a metal 3D printer that’s “more than four times faster than any binder jet competitor and offers a 100 times speed improvement over any laser-based system – all at up to 20 times less cost than other 3D metal printers.” They’ve made heavy investments in software, and they’re now selling printers to customers while revenues start to climb.
Given that Desktop Metal is backed by some deep pockets, we’re not overly concerned with their burn rate surpassing $100 million per year. Their flagship printer – the Production System – has 90 pre-orders which would bring in around $500 million to several billion in lifetime value (provided all orders are filled). Given the 2019 3D printing market is currently valued at around $12 billion, Desktop Metal is only scratching the surface right now with 2019 revenues of around $26.5 million. Much of the value on offer lies in their master plan.
After the IPO, Desktop Metal will have $526 million in cash, some of which they plan to make acquisitions with. They’ve shortlisted 60+ companies representing $2 billion worth of inorganic revenues. Of those, they’re in contact with ten.
While ExOne shareholders may be hoping their shares will be acquired at a premium, it’s likely they’re not even on Desktop Metal’s radar (we’ll explain why in a bit.) The initial focus for Desktop Metal will be on capturing the tremendous upside to be found in consumables. The below slide shows how much additional value can be realized by vertically integrating with metal powder suppliers. (Our emphasis in yellow highlight.)
Beyond vertical integration, there lies a vast open plain of metal 3D printing technologies and companies that could provide the 2 + 2 = 5 synergies that every MBA dreams of.
The Disparate World of Metal 3D Printing
We owe a great deal of our knowledge in metal 3D printing to the man who first helped us understand the space, CEO of Digital Alloys, Duncan McCallum. In spring of last year, we took a look at his exciting startup in a piece titled “Joule Printing – Fast, Low-Cost Metal 3D Printing.” We learned that there is no single winner in metal 3D printing. As seen in the below diagram, each approach to 3D printing metals can cater to a different use case based on part size, production volume, and material performance.
What Desktop Metal probably hopes to do is cherry-pick the winners of the lot and then bring them under their umbrella. They believe that the industry is now moving from Additive Manufacturing 1.0 to Additive Manufacturing 2.0, something they’ve defined as follows.
We previously looked at “10 Powder and Binder Metal 3D Printing Companies,” and counted more than 50 different companies working on 3D printing metals. Desktop Metal believes this opportunity for consolidation, coupled with organic growth, represents nearly one billion in revenues by 2025 – “the first $10 billion additive manufacturing 2.0 company.”
While Desktop Metal has a great product and an ambitious plan, the latter and $3 won’t get you a cup of coffee at Starbucks these days. An investment in Desktop Metal is a vote of confidence in their management team’s ability to execute. Several slides in the pitch deck highlight how strong the management team is, and how experienced they are in making acquisitions. If you’re someone who had their ass handed to them investing in Additive Manufacturing 1.0 (raises hand), this may be the type of opportunity you originally hoped you were investing in.
Investing in Desktop Metal Stock
One reason SPACs don’t benefit retail investors is that they behave so irrationally. Given most SPACs are priced at $10 per share when they debut, it’s easy to quantify this irrationality. For example, it was recently rumored that Switchback Energy Acquisition Corporation (SBE) would acquire ChargePoint. As of now, nothing has been filed with the SEC about this possible merger, yet shares of SBE are trading up +37%. It’s bad enough most SPACs trade at a premium before the deal even closes, but trading up on rumors is just pure stupidity. If you’re a serious retail investor who wants to buy shares and hold them for the long term, you need to wait for that dust to settle.
In looking at the SPAC Desktop Metal plans to merge with, Trine Acquisition Corp. (TRNE), shares closed at $11.50 today, a premium of about +11.5%. This pales in comparison to the premium other SPACs command. If Desktop Metal backs out of the deal, they’ll owe Trine almost $55 million which can then be added to the roughly $300 million already in the SPAC. That’s an increase in cash of about 18%. All things being equal, shareholders of Trine don’t have much downside if the proposed transaction fails to go through. If the deal does happen, you’re only paying – as of right now – a premium of +11.5% over what institutional investors paid to buy shares in Desktop Metal.
That’s a pretty simple analysis, but we’re pretty simple people. Having had our paws burned before investing in Additive Manufacturing 1.0., we’re a bit reluctant to invest in the companies producing the printers. Instead, we prefer the distributed manufacturing business model of Protolabs (PRLB), a company whose success isn’t dependent on which 3D printer maker comes out ahead in the long run. The appeal of going long Desktop Metal would be their management team’s ability to vertically integrate and expand margins, then consolidate the best 3D printing technologies out there under a single roof, dominating everyone who didn’t make the cut.
Desktop Metal Stock vs. ExOne Stock
As for ExOne, it’s hard to believe that Desktop Metal is aching to acquire a company that builds slow legacy 3D metal printers. They may not even see ExOne as a threat, something that’s hinted at when looking at Desktop Metal’s comparables.
Above you can see Stratasys and 3D Systems classified as “legacy additive manufacturing,” and then excluded from the averages because they’re presumably not fit to breathe the same oxygen as the others. (Having followed both these companies on their long downward slide to nowhere, we’re in agreement there.)
Legacy additive manufacturing – or Additive Manufacturing 1.0 – is also the same category where ExOne ought to be placed, but Desktop Metal has chosen not to include them. Is that a blatant dig at a competitor they plan to steamroll, or a hint that they’re currently in M&A talks? Who knows, but if you’re thinking about buying shares in a pure-play company that 3D prints metals, Desktop Metal, as it exists today, is a far better choice than ExOne, solely based on today’s analysis. Similarly, if you’re holding shares in ExOne today, maybe it’s a good opportunity to get out while the going is good. The same could be said for the other two publicly-traded “Additive Manufacturing 1.0” companies that have done nothing but disappoint shareholders over the years.
We were initially dismayed to hear that Desktop Metal went the SPAC route, but it seems they’ve figured it out. They have a compelling value proposition, they provided sufficient detail in their filing documents, and they’ve avoided the Robinhood hype train. The real value to be found is in Desktop Metal’s grand plan for consolidation within the metal 3D printing space. This may be the first SPAC we’ve looked at which makes sense for retail investors – at least at today’s prices.
Prior to the deal closing, the SPAC trades under the ticker symbol TRNE. Once the proposed transaction is complete, the ticker symbol will change to DM.