Desktop Metal Stock: It’s Not You, It’s Us.
Whoever proposes that “upspeak” should be viewed as acceptable in the workplace should choose another hill to die on. Also referred to as “Valley Girl talk,” this method of speaking telegraphs to the audience that you’re uncertain about what you are saying. To be seen as an authority, you need to speak and act with conviction. Having the cojones to make a decision when asked, even when limited information is available, is the hallmark of a competent manager. Speaking with confidence goes a long way towards convincing people you’re a capable decision maker.
When it comes to making investment decisions, the same holds true. You cannot be an authority on a topic if you contradict yourself. Consequently, we pay close attention to whether we’re saying negative things about a stock we’re holding or saying positive things about a stock we said to avoid. One stock that’s recently fallen into a grey area is Desktop Metal Inc. (DM).
A Complicated Relationship with Desktop Metal
Our experience with Desktop Metal has been a volatile one. Prior to the company going public, we wrote about them on more than one occasion. They were one of three shining stars in the 3D printing startup world, the other two being Carbon and Formlabs. We had nothing but good things to say about Desktop Metal, and that also involved interactions we had with the company over the years. Then, they decided to go public using a special purpose acquisition company (SPAC). While we were dismayed they chose this route to go public, we decided to add shares to our portfolio anyway. Then, this happened.
In less than 30 days following our purchase of Desktop Metal, shares more than doubled. Because we believe in the efficient market hypothesis, we sold off some of our position in the mid-20s. Later, when shares fell back down to earth, we sold the rest of our position based on a new rule we adopted – don’t buy shares of any SPAC until the merger is complete. Overall, we realized a return of +21% on our money doing what we consistently condemn – timing the market.
Once the Desktop Metal SPAC merger was complete, we checked back in to see that shares were excessively valued based on our simple valuation ratio. Today, that’s all changed with the announcement that Desktop Metal will be acquiring ExOne (XONE).
Desktop Metal and ExOne
When we first looked at the Desktop Metal SPAC deck, we were surprised to see no mention made of ExOne. Initially, we wrote that off as ExOne being of so little importance that they weren’t on Desktop Metal’s radar. When people talk about “eating crow,” it’s examples like this they’re referring to.
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.Credit: Nanalyze
We misinterpreted the absence of ExOne in Desktop Metal’s deck as a diss, when in fact it was probably because the two companies were already in talks. We quickly jumped to this conclusion because we’ve followed ExOne since their IPO, even having been invested in the company at one time, and watched them go nowhere fast. At least that’s what we thought. Here’s a look at ExOne’s annual revenue growth since their IPO (only the first half of 2021 has been provided):
If the second half of 2021 can achieve the same revenues as the first half, ExOne will be back on track with their growth. We previously thought ExOne wasn’t experiencing the sort of growth we expected from 3D metal printing, but the numbers don’t lie. Over the past eleven years, ExOne has managed to grow revenues at a compound annual growth rate (CAGR) of around +14.5% which isn’t half bad.
We incorrectly assumed that Desktop Metal didn’t mention ExOne in their investor deck because they didn’t see them as a threat. In reality, it was because the two companies were probably already mulling a possible merger. Our piece concluded with the following remark regarding ExOne being excluded from the Desktop Metal deck:
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.Credit: Nanalyze
Now that we know why ExOne was suspiciously absent from Desktop Metal’s comparables, we need to consider whether the merger makes sense.
Does One + One = Three?
A look at the acquisition deck gives us some clues as to why the merger makes sense from Desktop Metal’s perspective. The first benefit is the combined intellectual property of both firms. Instead of wasting legal fees battling things out in court, it’s better to combine forces and present a more formidable threat to other competitors.
The product offerings from both companies complement each other rather than compete. Desktop Metal can offer lower part costs at mass production volumes, while ExOne offers more customizable build parameters and larger build envelopes. All that money Desktop Metal invested in software will prove useful in making ExOne systems more turnkey.
ExOne adds 23 materials to Desktop Metal’s library which is approaching 250 materials. An additional 50 materials are in development across the combined companies.
The ExOne direct sales force can immediately be leveraged to help sell 3D printers for Desktop Metal, while the channel approach taken by DM can provide leads for ExOne’s sales team. Desktop Metal’s explosive growth will blend well with ExOne’s more gradual growth, hopefully leading to more revenue growth stability as time goes on.
Lastly, there’s talk about “realizing significant cost savings” which better come to fruition because both companies are burning through a lot of cash.
What to Do Next?
Desktop Metal is currently listed in our disruptive tech stock report as a “like,” which means we wouldn’t mind holding the company under certain conditions. The next step will be to wait for the merger to be finalized so that we know this is a done deal. In the meantime, Desktop Metal has provided us with a preliminary look at what the consolidated financials might look like.
After blowing through a good chunk of their SPAC cash acquiring EnvisionTEC and ExOne, DM has about $125 million remaining on their books. If they’re blowing a quarter of a billion dollars every year running their business, they’ll need to raise more money to survive – equity funding will dilute existing shareholders, while debt funding comes with its own risks. That’s one concern we have. Our tech investing methodology has always focused on revenue growth above all else, but we can’t help but notice the massive amount of cash being burned through here. They may have access to deep pockets now, but what happens when all that easy funding dries up?
Another concern we’ve noted is a sharp increase in volatility for shares of DM. On November 1st, shares of Desktop Metal spiked +24% on news that they were increasing production. This caused other 3D printing companies to spike as well, making us wary.
When an entire group of stocks moves in unison because of news that affects just one, it’s behavior that can at least be partially explained by Wall Street speculators. Just look at what happened earlier this year, something we wrote about in a piece titled Why Have 3D Printing Stocks Been Going Up Lately? At the start of this year, six pure-play 3D printing stocks moved dramatically upwards in unison over just three trading days. Yes, we said three days.
- 3D Systems (DDD) +119%
- Stratasys (SSYS) +36%
- ExOne (XONE) +33%
- Desktop Metal (DM) +27%
- Materialise (MTLS) +25%
- Protolabs (PRLB) +15%
And here’s what the market returned over the same time frame:
- Nasdaq (QQQ) +3.5%
When 3D printing stocks start moving dramatically together in unison, it’s usually for no good reason. While shares of Desktop Metal seem to have stabilized along with volume, we’re feeling even more confident that the best move to make here would be to wait for the Desktop Metal / ExOne merger to be finalized, then see if the combined entity is something we want a piece of. First announced in August, the merger is expected to be complete before the end of this year.
One last thing to note. Whenever a possible merger is announced, shares of the company being acquired usually trade in a very narrow range based on the terms of the deal. In the case of ExOne, their purchase price terms contain a moving variable – the DM stock price – which is why XONE shares are still exhibiting a great deal of volatility following the acquisition announcement.
We now have three stocks that fall under the metal additive manufacturing umbrella – Markforged (MKFG), Velo3D (VLD), and Desktop Metal. We’d like to find the best of the lot and enter a position. Desktop Metal has accomplished what they said they’d do – consolidate the fragmented metal 3D printing space – and hopefully they’ll emerge as the leader we’re looking for. They seem on track to do that, and once the ExOne acquisition is complete, we may well look at moving into a long-term relationship with Desktop Metal.
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