Desktop Metal Stock: Why the Wild Ride After the Q1 Earnings Release?

Desktop Metal (DM -3.71%) stock had a wild ride on Tuesday following the 3D printing company's release of its first-quarter 2021 results on the prior day after the market close.

Shares (which began trading in December 2020 following the company's reverse merger with a special purpose acquisition company, or SPAC) opened nearly 11% lower on Tuesday. But they gained back much of their lost ground by the end of the regular trading session, closing down just 1.4%.

We can only speculate as to the "whys." But it seems likely that the market's initial quite-negative reaction is probably attributable to some market participants not being happy about two main things: earnings and management not providing organic revenue. The latter adds to uncertainty -- and the market hates uncertainty.

So why did shares claw their way back up throughout the day on Tuesday? It seems likely there were two main reasons. First, some market participants probably viewed the initial sell-off as overdone, especially since revenue exceeded the Wall Street consensus estimate, and viewed the dip as a buying opportunity. Second, Desktop Metal stock likely got a lift from shares of 3D Systems surging 10% on Tuesday, as 3D Systems is often viewed as a bellwether for the 3D printing space. Shares of Stratasys popped more than 4%, which lends support to this theory.

Now let's take a look at Desktop Metal's second quarterly report as a public company.

Image source: Getty Images.

Desktop Metal's key numbers

Data source: Desktop Metal. GAAP = generally accepted accounting principles. 

First-quarter revenue (which increased 35% from the prior quarter) got a boost from the company's February acquisition of EnvisionTEC, which is involved in the polymer 3D printing space. The size of this boost isn't known because the company didn't provide an organic revenue number. (Organic revenue doesn't include the impact of acquisitions made over the last year.) So we cannot gauge how well Desktop Metal's core metal 3D printing business performed in the quarter.

The GAAP net loss includes a noncash negative change in fair value of warrant liability of $56.6 million and an income tax benefit of $27.9 million.

The non-GAAP (adjusted) numbers exclude the impact of the change in fair value of the warrant liability and some other smaller one-time items. The adjusted numbers do not exclude the tax benefit. 

Wall Street was looking for a loss per share of $0.12 on revenue of $9.4 million. So, Desktop clearly beat on the top line. The bottom-line picture is murky, as it's unclear whether that bottom-line expectation refers to an adjusted result, as is usually the case, or the GAAP result. The data is conflicting on this point.

Don't get hung up on the "beat or non-beat" issue, however. The big takeaway here is that there are only a few Wall Street analysts providing quarterly estimates for the company, which means you should pay even less attention to these estimates than usual. Another takeaway is that even if viewed as an earnings beat, that beat is largely due to the tax benefit.

In Q1, the company used $41.1 million in cash running its operations, compared to using $22.4 million in cash in the year-ago period. Nonetheless, its liquidity position remains powerful. It ended the period with $572.2 million in cash, cash equivalents, and short-term investments. It has a negligible amount of long-term debt. 

For context, for full-year 2020, Desktop Metal's revenue dropped 38% year over year to $16.5 million. Management attributed last year's revenue decline primarily to the pandemic, which caused some customers and potential customers to pause their ordering. In 2020, net loss narrowed 13% to $90.4 million, or $0.57 per share.

What management had to say

Here's what CEO Ric Fulop said in the earnings release:

We are pleased with the strong start to the year. Revenue growth accelerated as we captured strong organic momentum and inorganic [acquisition] opportunities. Continued innovation in our core business, coupled with our inorganic strategy, strengthens our ability to grow our product portfolio, expand the high-volume applications we can offer customers, and increase our category leadership. We are well positioned to execute on our long-term growth strategy focused on Additive Manufacturing 2.0 for high-volume, end-use parts.

Here's what CFO James Haley said on the earnings call when asked by an analyst about organic revenue: 

So that is not something we're disclosing today. On our last call, we did indicate that we expected roughly 60% of our [full-year] revenues to come from DM organic and 40% from inorganic [acquisitions], and I would say we're still trending in that direction. I think what we'll see quarter to quarter, there'll be some variances. But really our full-year view has not changed at this point.

Guidance for full-year 2021

The company reiterated the outlook that it issued last quarter. For 2021, it expects revenue of "over $100 million." Moreover, it projects that it will exit the year with an annualized revenue run rate of $160 million. In other words, it probably expects fourth-quarter 2021 revenue of about $40 million. 

Conclusion?

It's considered good form at The Motley Fool to end our earnings articles with a brief conclusion. However, it's not possible to opine here that the company performed "mediocre" or "it appears to be on track" or the like because it didn't break out organic performance.

So, I'll end on a note similar to what I said last quarter: Desktop Metal's metal 3D printing technology and overall strategy seem promising. But at this early point in its commercialization journey, its stock is speculative.