Given its current state, investors might struggle with the investment case for Nano Dimension (NNDM -3.83%) even though it has drawn the interest of Cathie Wood's ARK Invest funds. While the company holds the potential to upend a vital part of the tech industry, customers seem slow to warm to its product. For this reason, investors need to more closely weigh Nano Dimension's prospects against its ongoing challenges before deciding to open a position.

Technician working with a circuit board at a desk.

Image source: Getty Images.

The potential rewards of Nano Dimension

Israel-based Nano Dimension develops 3D-printed electronic systems. It combines nanomaterials with 3D inkjet and 3D software to manufacture multilayer printed circuit boards (PCBs). It produces these circuit boards through its DragonFly LDM system, which applies lights-out digital manufacturing (hence the "LDM"), described by the company as the "only comprehensive additive manufacturing platform" for making electronic circuitry with 3D printing.

Procurement compliance company Beroe estimates the size of this industry at $58 billion in 2020, with the potential to reach $70 billion by 2024. Nonetheless, the circuit board industry draws relatively little interest from investors. According to industrial sourcing and marketing company Thomas, the largest circuit board manufacturer is Jabil, which receives little investor coverage despite employing about 260,000 people and supplying clients such as Apple and Amazon.

Now, Nano Dimension can replicate that company's manufacturing process within a 3D printing unit, posing a serious competitive threat to manufacturers such as Jabil. As longtime tech industry observers will recall, today's HP printer can print brochures and newsletters that would have required the services of a commercial printer in the previous century. Likewise, Nano Dimension's 3D printer allows a small or medium-sized business to create circuit boards in-house.

This could reduce the potential client base of large manufacturers. Moreover, it could also allow businesses and entities of nearly all sizes to produce specialty electronic products in small batches. That could facilitate the production of new devices from small and large manufacturers alike. Among its more recent new clients are defense agencies, contractors, and the U.S. military itself.

Furthermore, Nano Dimension holds about $1.4 billion in liquidity. This gives it a large amount of capital that it can invest in acquisitions and product improvements. To that end, it bought Nanofabrica and DeepCube in April, moves that will likely improve its miniaturization and deep-learning capabilities, respectively.

Additionally, Nano Dimension also released its next-generation 3D printer, the DragonFly LDM 2.0, in May, and it plans to release two new generations of machines within the next 18 months.

Nano Dimension's risks

Nonetheless, investors likely to feel encouraged by the value proposition might start to harbor doubts when realizing that the company remains in a very early stage of its development. Nano Dimension sold only 61 units between 2018 and 2020. 

Its financials also reflect that early stage position. Revenue for the first quarter of 2021 came in at only $811,000. This is up from $702,000 in the year-ago quarter. Also, its net quarterly loss came to $9.3 million, significantly higher than the $3.5 million loss in the first quarter of 2020, as operating expenses more than doubled.

However, the quarterly year-over-year increase may point to a recovery. In fiscal 2020, Nano Dimension reported revenue of $3.4 million in 2020, a 52% decline from 2019 levels as sales suffered amid the pandemic. The drop also came at a time of rising operating expenses, especially general and administrative expenses, which surged more than sixfold. As a result, its operating loss in 2020 came to almost $36 million, an increase of about 240% from the nearly $15 million it lost in 2019.

Investors should also note that the company earned almost $2 million of its $3.4 million in 2020 revenue in the fourth quarter alone. That revenue level came in at about the same level as the just under $2 million earned in the fourth quarter of 2019, indicating that the company's recovery from the pandemic made significant progress in the last three months of 2020.

Although the company did not release Q2 or full-year 2021 guidance, analyst estimates point to continued increases as they predict sales of about $5 million in fiscal 2021. While that would mean an increase of nearly 50% from 2020 levels, many investors may still perceive the company's concept as unproven. 

Without more significant sales numbers, the Israel-based company has turned to the issuance of more ADR shares for its financing. Today, more than 256 million shares trade on exchanges, and this count has risen exponentially. In July 2020, the shares outstanding stood at just over 46 million. Two years ago, that count was only 3.6 million. This share issuance was probably a major factor in the tech stock's drop from almost $18 per share in January to just below $5.50 in mid-May, though the share price has since risen.

NNDM Chart

NNDM data by YCharts

Its run-up has also brought with it valuation concerns, at least from one key perspective. The company's market cap now stands at just over $2.1 billion. Consequently, Nano Dimension sells for a price-to-sales (P/S) ratio of just over 250!

Still, this might mislead investors, because Nano Dimension's liquidity reflects most of the company's value. As a result, its price-to-book value ratio stands at around 1.4, well below the average S&P 500 book value multiple of 4.7.

Should you consider Nano Dimension?

Even with the risks, Nano Dimension's value proposition holds too much potential to ignore. Admittedly, the lack of sales and massive share issuances should rightly concern investors.

However, the opportunity for more-affordable specialty circuit boards could offer electronics manufacturing capabilities to small businesses in the same way that inkjet printers brought the power to create professional-looking publications to individuals. That prospect in itself could lead to crazy returns in the coming years.