Desktop Metal Stock Jumps Following Earnings Release. Is It a Buy?

Shares of Desktop Metal (DM -1.27%) gained 11.6% on Tuesday following the 3D printing company's release of preliminary fourth-quarter and full-year 2021 results on the prior afternoon. And shares climbed 5.8% on Wednesday, though they were helped by a strong tailwind from the overall market, as the S&P 500 and Nasdaq Composite jumped 2.6% and 3.6%, respectively. For context, on Wednesday, shares of rival 3D Systems rose 5% on no news.

No doubt, investors liked that Desktop Metal's fourth-quarter revenue and full-year 2022 revenue guidance came in higher than Wall Street had been expecting, and that the Production System P-50 is now in the commercialization stage.

On the other hand, the company continues to post large losses and burn through cash at a rate that points to a likely stock offering on the not-too-distant horizon. 

So, is Desktop Metal stock a buy? Before we explore that question, let's dig into the company's results.

A 3D-printed object. Image source: Getty Images.

Desktop Metal's key quarterly numbers

Data source: Desktop Metal. GAAP = generally accepted accounting principles.*Only annual number provided. Some numbers were calculated by author since across-the-board quarterly numbers weren't provided.

The quarter's revenue included a half-quarter of contribution from ExOne, which Desktop acquired on Nov. 12. That amount was $15.5 million. 

Desktop Metal's fourth-quarter revenue increased 123% from the third quarter of 2021. Excluding the contribution from ExOne, sequential growth was 62%. That said, this 62% figure does not equate to organic growth, since Desktop made quite a few acquisitions over the past year. 

Fourth-quarter GAAP gross margin was 22% and adjusted gross margin was 31%. In the third quarter, GAAP gross margin was 16% and adjusted gross margin was 27%, so it seems fairly safe to assume that the ExOne acquisition helped the overall gross margin.

The quarter's GAAP net loss of $71.2 million included $10 million in transaction costs associated with acquisitions and $8.3 million of changes to fair value of investments. The company's release didn't specify adjusted (non-GAAP) net income.

For the fourth quarter, Wall Street was looking for an adjusted loss of $0.09 per share on revenue of $49.6 million. (The consensus estimate was $46.4 million at the time of my earnings preview.) So, Desktop sped by the top-line expectation, but didn't issue a quarterly adjusted-loss result, so we don't know how that stacks up against the consensus estimate. 

Why were the results only preliminary?

"Preliminary results" are results that were prepared internally by the company but not yet audited by an independent entity.

In general, investors do not want to see companies failing to get their results audited in time to release final results on their scheduled release dates. It can reflect suboptimal planning or inadequate accounting resources, among other more-concerning issues.

That said, this dynamic isn't uncommon, and the issuance of relatively rare preliminary results isn't usually of concern. (3D Systems, for instance, released preliminary results for full-year 2020 shortly before releasing its final results.) It makes sense that Desktop Metal's acquisition of ExOne in November caused it to seek a delay in filing its 2021 annual report. 

In the earnings release, Desktop said that on March 2, it filed the appropriate form for the delay with the Securities and Exchange Commission (SEC), and expects to file its annual report within the 15-day extension period.

Cash burn remains a concern

In the fourth quarter, Desktop Metal used cash of $44.9 million running its operations, compared with using $21.7 million of cash in the year-ago period.

For full-year 2021, the company's cash flow from operations was negative $155 million, compared with negative $80.6 million in 2020.

In addition, in 2021, Desktop spent cash of $287.6 million on acquisitions, the largest of which was ExOne. That $561.3 million deal was financed through cash of about $191 million and the issuance of new shares for the remainder.

The company ended 2021 with cash, cash equivalents, and short-term investments of $271.7 million. Given its cash-burn rate, even excluding the cash used in the ExOne deal, it seems likely that Desktop will need to raise funds in the relatively near future. 

Production System P-50 launched in Q1 2022

Reiterating what I wrote in my earnings preview, in late February, "Desktop Metal announced that it has shipped its first P-50, its flagship 3D printing system for mass production of end-use, metal parts. The customer is Stanley Black & Decker, the maker of industrial tools and other industrial and household products."

What management had to say

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

With record total revenue, organic revenue, and gross margins, the fourth quarter was an exceptional finish to a revolutionary year for Desktop Metal. We also recently commenced shipments of our flagship Production System P-50, a major milestone for Desktop Metal and the additive manufacturing industry. ... We believe our strategic priorities in 2022 will ensure continued success toward achieving our goal of double-digit share of the over $100 billion additive manufacturing market by the end of the decade. [Additive manufacturing is the commonly used technical name for 3D printing.]

2022 guidance

For full-year 2022, management guided for the following:

• Revenue of about $260 million, representing 131% annual growth.
• Earnings before interest, taxes, depreciation, and amortization (EBITDA) of approximately negative $90 million. In 2021, adjusted EBITDA was negative $96.1 million, so management expects this loss to narrow by about 6%. 

Going into the report, for 2022, Wall Street was modeling for revenue of $253 million (the consensus was $246.9 million at the time of my preview) and an adjusted loss of $0.32 per share. So revenue guidance came in higher than analysts had been expecting.

On the earnings call, Fulop clarified that the 2022 outlook is for the business as it stands now.

A mixed bag -- and why the stock isn't a buy for most investors

The company's report was a mixed bag. The key positives include a continuation of strong revenue growth and gross margin moving in the right direction, and the P-50 entering the commercialization stage.

The key drawbacks: Desktop Metal is still posting large losses, and its revenue growth has come at a substantial cost, as it's been burning through a lot of cash and issuing new shares to make acquisitions. It seems more likely than not that the company will have to raise cash in 2022. If that raise is done via a new stock offering, current investors will once again have their ownership stake diluted. 

There's also one huge and very relevant unknown: How will the P-50 fare in the marketplace? Repeat sales to several customers would be a good sign -- and one that investors should watch for. Given the P-50 only began shipping in February, it probably won't be until at least the second quarter that the company has data of value about the early progress of the commercialization stage.

Moreover, there's a market-related issue: Desktop Metal stock trades at less than $5 per share. (On Wednesday, it closed at $4.18.) Many institutional investors will not buy (or will greatly hesitate to buy) "penny stocks," which are commonly defined as stocks trading for less than $5 per share. They view these stocks as too risky and volatile. In other words, it's probably going to take significantly more good news for Desktop Metal to rise above $5 per share and sustain that rise.

While The Motley Fool's focus is on long-term investing, it makes sense to consider the above issue, especially in light of the current turbulent market conditions, which have been driving many investors away from higher-risk stocks toward those they consider safer havens.