Desktop Metal Stock Craters 61% — Earnings Were Not the Main Cause

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Desktop Metal (DM -61.11%) stock closed down a whopping 61.1% on Tuesday following the 3D printing company’s release of its first-quarter results before the market open. The stock was already in the risky “penny stock” category — that is, priced below $5 per share — before the earnings release. It’s now even deeper in penny stock territory, as it closed at $1.33 per share on Tuesday. 

It’s probably safe to assume that neither the quarter’s revenue nor earnings were among the main reasons for investors’ ire. The top line beat Wall Street’s consensus estimate, and the bottom line fell only slightly short of analysts’ expectations.

There are two main reasons, in my opinion, why investors furiously dumped the stock. First, the company continued to burn through cash at a fast and unsustainable rate, so investors are concerned about its liquidity. Second, investors are getting increasingly concerned about how the flagship P-50 production system is being received in the marketplace.

Image source: Getty Images.

Desktop Metal’s key numbers

Metric Q1 2022 Q1 2021 Change
Revenue $43.7 million $11.3 million 286%
GAAP operating income ($69.5 million) ($30.7 million) Loss expanded 126%
Adjusted operating income ($44.6 million) ($21.2 million) Loss expanded 110%
GAAP net income ($69.9 million) ($59.1 million) Loss expanded 18%
Adjusted net income ($43.4 million) $7.0 million Result flipped to negative from positive
GAAP earnings per share (EPS) ($0.22) ($0.25) Loss narrowed 12%
Adjusted earnings per share (EPS) ($0.14) $0.03 Result flipped to negative from positive

Data source: Desktop Metal. GAAP = generally accepted accounting principles.

Products revenue increased 283% year over year to $39.5 million, and services revenue rose 322% to $4.2 million. Revenue got what was likely a very sizable boost from acquisitions made over the last year — particularly from ExOne, acquired in November. However, Desktop Metal doesn’t provide organic revenue results on a quarterly basis, so investors can’t know the magnitude of the benefit from acquisitions.

Wall Street was looking for an adjusted loss per share of $0.13 on revenue of $41.6 million. So Desktop fell slightly short on the bottom line but beat the top-line expectation.

Cash burn 

Cash burn remains a concern, as I wrote after last quarter’s results were released. Indeed, Desktop Metal continued to burn through cash at a fast pace in Q1. 

The company used $56.3 million running its operations during Q1, compared with using $41.1 million to run its operations in the year-ago period. It ended Q1 with $206.5 million in cash, cash equivalents, and short-term investments. 

It’s clear from these numbers that the company needs an infusion of cash fairly quickly. It shouldn’t have surprised investors that it announced that it was raising cash, as covered below.

Convertible senior notes offering

Before the market open on Tuesday, Desktop announced that it intended to offer $150 million in convertible senior notes due in 2027 in a private offering to institutional buyers. It also expects to grant the initial purchasers an option to buy up to an additional $22.5 million principal amount of notes.

The notes “will accrue interest payable semi-annually in arrears and will mature on May 15, 2027, unless earlier repurchased, redeemed, or converted,” the company said in the press release. “The interest rate, initial conversion rate, and other terms of the notes will be determined at the pricing of the offering.”

P-50 status?

No doubt, investors were disappointed that Desktop Metal’s earnings release had no mention of the P-50, other than to say that shipments began in the quarter. Investors were surely hoping to learn of additional sales of the P-50, the company’s flagship 3D printing system for mass production of end-use metal parts.

Many investors already knew that the P-50 began shipping in the first quarter, as Desktop issued a press release in February saying that the first system had shipped and that the recipient was Stanley Black & Decker. Moreover, the company included this information in the early-March release of its fourth-quarter 2021 results.

2022 guidance reaffirmed

Management reaffirmed the full-year 2022 guidance that it released last quarter. This outlook was for the company as it stood at that time. For 2022, management expects: 

  • 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%. 

Penny stocks are for short-term traders

With a stock price below $5 per share even before Tuesday’s shellacking, Desktop Metal was already a stock not suited for the majority of long-term investors, who should stay away from so-called penny stocks because they are very risky. 

With the stock’s price now below $2 per share, short-term traders will likely have even more control of this stock. Extreme volatility is possible.