If we had to choose our best quality, it would probably be modesty. Unlike other experts, you won’t constantly hear us posting our best calls. We almost never mention the fact that we sold our stake in Ali Baba just before the shares fell due to the risks we flagged. This call we made to Palantir and their reliance on the government? We don’t talk about that a lot. The same goes for our disclaimer on Zymergen and Ginko Bioworks. And all the over-the-counter junk stock we’ve called over the years isn’t worth mentioning either. Regular readers know our conservative approach to tech investing is working, which is why we don’t need to talk about selling our Desktop Metal (DM) position at an average of $14.76 per share. Well, actually, we have to talk about it.

We always thought Desktop Metal offered a compelling story long before they decided to go public using a sspecial pgoal aacquisition vsbusiness (after-sales service). When the SPAC merger was announced, we bought stock in the company despite warning of the dangers of SPACs for years. Then, when prices doubled due to the hype, we started selling stocks. Finally, after adopting a new rule not to invest in SPACs that had not yet finalized their merger, we liquidated our entire DM position. In doing so, we broke one of our most important rules: don’t try to time the markets. Just because we made money on the trade doesn’t mean it was the right thing to do.

Of the 90 disruptive tech SPACs we’ve covered, just over a third are trading at a 50% discount to their offer price, Desktop Metal being one of them.

Since the stock currently sits in our tech stock catalog as a “like,” we want to assess the company’s year-end results to see if that sentiment still holds true today.

Acquisitions of Desktop Metal

In September 2020 we wrote “the real value to be found is in Desktop Metal’s grand plan for consolidation within the metal 3D printing space”. This vision is one of the reasons we love the company, and their consolidation effort was completed in 2021 after acquiring ten companies for a total consideration of $1.11 billion, a frenzy that culminated with the purchase of the main competitor ExOne.

The two largest acquisitions above – ExOne and EnvisitonTEC – did not come cheap with goodwill accounting for 61% and 64% of the purchase price respectively. As we’ve seen in the cannabis world, companies that want to make hasty acquisitions often pay exorbitant prices, and accountants justify all that excess with “goodwill.” In the case of ExOne, we find it hard to understand why such a bonus was paid when the company was unable to extricate itself from a damp paper bag.

Desktop Metal recently announced its year-end results which exceeded expectations with 2021 revenue of $112.4 million. Only 14% of this number came from ExOne, while 66% came from all acquisitions combined, although these have yet to be sufficiently audited. Once all the numbers are calculated, hopefully they will define some report segments so that we can see where the revenue growth is coming from.

Desktop Metal’s management team has given investors a number of goals to pay attention to – 2021 revenue of $260 million (reach $1 billion by 2025) and the focus on profitability. In 2021, Desktop Metal used cash in operating activities of $155.0 million and ended the year with $269.6 million in cash. The amount of money they have burned has been a concern so great to see management taking care of that.

The P-50 production platform

We currently hold three 3D printing companies in our own tech stock portfolio and are not looking for a third. That being said, we have to rate Desktop Metal as either a stock we like or a stock we avoid. Our original bull thesis surrounded their efforts to consolidate the fragmented space of metal 3D printing and they seem to have made progress there. But somewhere along the way, we lost sight of what made Desktop Metal appealing in the first place – the world’s largest and fastest metal 3D printer.

It was a key talking point when we interviewed the company in 2019, and here’s what they told us:

Two major customers have already purchased the production system. One is a “very large Fortune 500 company” which Myerberg declined to identify at this point. Nor could he specify the type of components that the customer manufactures in his factory. The other is an India-based company called Indo-MIM which is one of the largest metal injection molding manufacturers in the world.

Nanalyze phone interview with the DM CTO in December 2019

Fast forward to today and the first sale of the P-50 has just been announced at Stanley Black & Decker. We can probably assume this represents a different generation from the original platform they spent four years and $100 million developing. On the year-end call, analysts pressed Desktop Metal executives for more information on what kind of sales we can expect to see from the P-50. For example:

So how about just focusing on the P-50? If I remember correctly, a year and a half ago when you first came out you said you had 84 reservations about the machine or something like that. I’m just curious, could you tell us where you are with the backlog and visibility on the P-50 and maybe how many more machines you’re going to ship this year?

Seeking Alpha DM Q4-2021 Earnings Call Transcript

The company’s response was vague and outlined how it was increasing its manufacturing capacity to meet demand. Throughout the call, they seemed evasive in answering P-50 questions. At one point during the call, Chairman and CEO Ric Fulop remarked:

So I’m very satisfied with the demand for the product. I’m very happy with the internal plans, but we’re going to do it wisely so that we have happy customers on the other side.

Seeking Alpha DM Q4-2021 Earnings Call Transcript

We feel that the initial deployment of the production system encountered major issues and that Desktop Metal needed to go back to the drawing board and develop a second or third generation product that is now available to customers. This theory can be supported by Mr. Fulop’s comment to Forbes in January 2019 regarding their Series E round, “we are funded by the balance of cash flow”. Perhaps there were high expectations at the time that have since become rooted in reality. Still, it remains to be seen whether the Production System P-50 printer we’ve heard so much about lives up to expectations.

Love the desktop metal stock

In January 2019, Desktop Metal raised $160 million from institutional investors at a valuation of $1.3 billion. At that time, the company had no great aspirations to consolidate the industry. Today the company is valued at $1.56 billion and they have spent $1.1 billion in total consideration to acquire ten companies. The end result is an entirely different value proposition than it started out, albeit more fairly evaluated. If we analyze Desktop Metal’s fourth quarter 2021 revenue of $56.7 million, we get $226.8 million annualized, which gives us a simple valuation ratio of about 7 (it was over 100). We’d hardly consider this overpriced, and it’s about in line with other 3D printing companies we’ve covered such as Markforged (7.5) and Xometry (7).

If the P-50 fails to become the success story everyone has been waiting for, what would they be if they hadn’t acquired ten companies? Just another bankrupt company that pivoted. Management has a master plan that forces investors to trust in their ability to execute. Waiting for. we will come back to the company once the following additional information is available:

• More color around the success or failure of the P-50
• A breakdown of revenue by type – printer sales vs Desktop Health vs Desktop Labs
• Consolidation and full audit of all acquired companies

Finally, investors should watch out for dilution. Prior to the execution of the SPAC, existing DM shareholders held 183 million shares outstanding. An additional 63.1 million shares were issued during SPAC, followed by an additional 64.9 million shares issued during the rapid acquisition frenzy, with the end result being 311 million shares outstanding.

Conclusion

SPACs have limited information to begin with. After raising tons of money, some like Desktop Metal are embarking on quick acquisitions. The end result is that what SPAC started has nothing to do with what it will end up being. In order to understand what Desktop Metal has become, the company needs to segment its revenues and begin to prove to investors some granularity in financial reporting. Plus, they need to provide some color on the success of their flagship P-50 platform that analysts seem to be craving.

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