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

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

Key Points

Q4 revenue grew 577% year over year, beating the 490% growth Wall Street had expected.

Management guided for 2022 revenue of $260 million, an increase of 131% year over year.

The Production System P-50 began shipping in Q1 2022.

Shares of Desktop Metal ( NYSE:DM ) 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

Revenue $56.7 million $8.4 million 577% GAAP operating income (loss) ($59.5 million) ($26.3 million) Loss widened 126% GAAP net income ($71.2 million) ($25.4 million) Loss widened 180% GAAP earnings per share ($0.27) N/A* N/A 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 […]

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