Desktop Metal (DM 0.25%) stock dropped nearly 12% last Thursday, following the 3D printing company's release of its third-quarter report. The market was up big that day, with the S&P 500 index rocketing 5.5%. So, it's possible shares would have been walloped even harder had the market not had such a great day.
While Desktop Metal shares have since gained back their lost ground, the post-earnings-release decline still reflects that investors did not like the company's report. Indeed, it was a disappointing report. Specifically, third-quarter revenue and earnings fell short of Wall Street's expectations, management substantially lowered its full-year guidance for both the top line and a key profitability metric, and the company's cash-burn rate continued at a fast pace relative to its cash position.
Desktop Metal's key numbers
| Metric | Q3 2021 | Q3 2022 | Change* |
|---|---|---|---|
| Revenue | $25.4 million | $47.1 million | 85% |
| GAAP operating income | ($63.6 million) | ($57.8 million) | Loss narrowed 9% |
| Adjusted operating income | ($28.2 million) | ($32.1 million) | Loss widened 14% |
| GAAP net income | ($66.9 million) | ($60.8 million) | Loss narrowed 9% |
| Adjusted net income | ($27.3 million) | ($33.1 million) | Loss widened 21% |
| GAAP earnings per share (EPS) | ($0.26) | ($0.19) | Loss narrowed 27% |
| Adjusted EPS | ($0.10) | ($0.10) |
Flat |
Data source: Desktop Metal. GAAP = generally accepted accounting principles. *Calculations by author, except for revenue YOY growth, which was provided by company.
Revenue growth was not entirely organic (which excludes contributions from acquisitions made within the last year). But management doesn't disclose organic revenue growth on a quarterly basis, so investors can't know how much of a boost acquisitions provided to year-over-year growth.
Sequentially, revenue declined 18%, as the company generated revenue of $57.7 million in the second quarter.
Wall Street was looking for an adjusted loss per share of $0.08 on revenue of about $60 million. So Desktop missed both expectations, with the top-line miss a large one.
The third quarter's GAAP gross margin was negative 0.7% and its adjusted gross margin was 19.9%. These are weak results, and are down from 14.6% and 26.7%, respectively, in the second quarter.
Liquidity remains a concern
The company used $39.7 million running its operations during the third quarter. It ended the period with $217.3 million in cash, cash equivalents, and short-term investments.
Assuming the company doesn't spend any money on growth initiatives (which seems unlikely), its cash would last about five and a half quarters at the current operating cash-burn rate.
P-50 status
The P-50, which launched in early 2022 after years of delays, is the company's flagship 3D printing system for mass production of end-use metal parts.
In February, the company issued a press release saying that the first system had shipped and that the recipient was Stanley Black & Decker. However, it's not clear whether this was an actual sale.
In the earnings release, Desktop said that it's "actively engaged with some of the largest companies in the world on Production System P-50 while remaining steadfast in building a pipeline for this platform."
The lack of P-50 sales could be due entirely or partly to the challenging macroeconomic environment, as many companies are putting off spending decisions on bigger-ticket items. That said, there remains a question mark surrounding this system's ability to gain traction in the market.
2022 guidance lowered
Management issued guidance for the fourth quarter and substantially lowered its full-year outlook. For 2022 (at the midpoints of the guidance ranges), it pared back its prior revenue guidance by $55 million and widened its expected adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss by $30 million.
|
Metric |
Q4 2022 Guidance |
Prior Full-Year 2022 Guidance |
Current Full-Year 2022 Guidance |
Full-Year 2022 Projected Change YOY |
|---|---|---|---|---|
|
Revenue |
$51 million to $62 million |
$260 million |
$200 million to $210 million [$205 million midpoint] |
78% to 87%* |
|
Adjusted EBITDA |
($26 million) to ($20 million) |
($90 million) |
($123 million) to ($117 million) [($120 million) midpoint] |
Loss projected to widen 28% to 22%** |
Data source: Desktop Metal. YOY = year over year. *Not all organic growth. **Calculation by author; 2021 adjusted EBITDA was negative $96.1 million.
Long-term investors should avoid this stock
Long-term investors should continue to avoid Desktop Metal stock. "Penny stocks" (those with share prices less than $5) are highly risky and volatile. They are best left to short-term traders.
Moreover, Desktop's liquidity remains a concern. Many companies are already being cautious with their spending. So, if the economy worsens or uncertainty persists for some time, Desktop's liquidity situation could become more worrisome.
