Over the past several years, 3D printing has developed into a high-speed technology capable of mass production. Desktop Metal (DM -0.29%) wants to lead the way in bringing 3D printing to mainstream manufacturing -- and with the help of two primary catalysts, this up-and-coming company could eventually become a $100 stock.
1. Additive manufacturing is a growing industry
Additive manufacturing, also known as 3D printing, has traditionally been used for prototypes and other small-volume applications. However, its slow speed always limited production volumes to just hundreds or thousands of parts per year.
Image source: Getty Images.
Additive manufacturing is a much more flexible technology than traditional production methods that use stamping or tooling to produce components. There are multiple approaches to additive manufacturing, but Desktop Metal's is based on a multi-step process known as binder jetting:
- Lay down powdered material.
- Apply a wet binder.
- Heat the layer to dry it.
These tiny layers are stacked on top of each other to form the object according to the software design the printer is referencing. Over the years, printers have steadily gotten faster, increasing potential printer output to tens of thousands of parts per year.
Additive manufacturing's flexibility, combined with faster printers that can produce more components, is steadily making it a more attractive tool for businesses. Major manufacturers such as Volkswagen are now planning to incorporate 3D printing into their future production. Desktop Metal's management estimates that the additive manufacturing market could grow to $146 billion by 2030.
2. Desktop Metal is taking 3D printing to new speeds
Desktop Metal has developed a proprietary method called "single-pass jetting," which saves time by performing the various steps of binder jetting all at once. Desktop Metal claims its single-pass jetting printers can produce hundreds of thousands of parts per year, as much as 100 times faster than existing competitors.
This increase in speed moves 3D printing squarely into mass-production quantities, and Desktop Metal already boasts some impressive customers, including Ford, Eaton, and EAC. These large manufacturers' adoption of 3D printing could be a sign of things to come.
Desktop Metal's printers can build objects in more than 225 materials , including metals, stainless steel, wood, polymers, and composites. Approximately 300 issued and pending patents protect Desktop Metal's technology.
A competitive field
Desktop Metal wants to sell an entire product ecosystem, but those efforts all begin with selling printer hardware. The printers generate quick revenue for now, but the company's really aiming for a long-term relationship selling services and printing materials to the companies that purchase those printers.
This is a competitive space, and Desktop Metal is fighting with many companies to be that supplier. Desktop Metal currently has minimal market share. Bigger competitors such as General Electric and Hewlett-Packard have been around longer and have existing hardware footprints within the market. That aforementioned Volkswagen deal went to Hewlett-Packard, not Desktop Metal.
As a new competitor in additive manufacturing, Desktop Metal could be in for a fight for market share over the coming years. Desktop Metal's most capable printers cost two to three times as much as its competitors'. Still, its speed advantage lowers the cost per part in the production process, providing cost savings over the lifetime of the printer.
The versatility to print in more materials and its industry-leading speed is poised to carve out its fair share within the industry. And the cost savings of printing many parts over a long time frame make large Desktop Metal a great fit for large manufacturers such as Ford.
Desktop Metal's business is ramping up
Desktop Metal is at the beginning stages of bringing its printers to market. Revenues in 2020 were just $16 million, but management is guiding revenue to exceed $100 million in 2021, a more than six-fold increase. However, that increase could result largely from Desktop Metal's February purchase of polymer-printing specialist EnvisionTec. Desktop Metal didn't tell investors what its 35% year-over-year Q1 sales growth would have looked like without the extra sales from EnvisionTec, so we have no way of knowing how much of those additional sales came from its existing operations.
Revenue growth in the near term will be driven by printer sales, as Desktop Metal works to establish its market share. In Desktop Metal's Q1 2021 earnings , printers and other product sales represented 91% of total revenue. The remainder of revenues came from services provided, such as installation, training, and hardware/software support.
The printers' low margins led to a net loss of $59 million, but gross margins on products sold dramatically improved year over year. In the first quarter, product gross margins almost broke even, and this could improve further as Desktop Metal begins to move more units. Over a seven- to 10-year period, Desktop Metal estimates that cumulative gross margins will eventually exceed 50% when factoring in lifetime consumables and services.
Over time, revenues from services and sales of printing materials could become a more significant contributor, pushing Desktop Metal to profitability as the business grows larger. As a result, investors will want to keep an eye on Desktop Metal's revenue breakdown and how that affects its margins moving forward to ensure that the company finds a viable path to profitability down the road. If the company succeeds, Desktop Metal's stock could multiply along with the industry.
The potential uses for 3D printing are so far-reaching that Desktop Metal only needs to take a slice of this market to become a lucrative investment. Right now, Desktop Metal has a market cap of only $3 billion. Grabbing just 5% of that estimated total $146 billion additive manufacturing market by 2030 would bring Desktop Metal's annual revenue to $7.3 billion -- that's 60% growth per year.
Even if the company's price-to-sales ratio shrank from its current 32 times to five times by 2030, the resulting market cap of $36.5 billion would represent more than tenfold growth from Desktop Metal's current size. This works out to a share price in the $130s -- compared to around $13 at the time this story's published -- by the end of the decade. While the company could fail to follow through on its big goals, the potential for growth based on Desktop Metal's small size and the large addressable market seems compelling enough to merit your attention.
