Desktop Metal (NYSE:DM) was one of the great winners of the 2020-21 era when it soared to around $35 per share at its highs.
Then came the plunge, and it was rapid. Shares of DM have fallen precipitously and continuously since then, all the way to just $1 and change per share.
While it’s probably fair to say DM stock was seriously overvalued a couple of years ago, the vast collapse in share price may now be an opportunity to scoop up a stock on sale. Is DM stock a good deal?
Why Did DM Stock Fall?
In order to understand what led to the crash in share price, we first need to know what triggered the bubble in DM stock price a few years ago.
It’s not at all hard to see what had investors excited by looking at the company’s financial statements. In Q2 2021, DM revenues grew by 766.9% year-over-year. The following quarter, remarkably, the pace of growth was even higher at 906.6%.
Even the final quarter of the year’s slowdown to 577.3% was eye-wateringly high.
The first two quarters of 2022 didn’t disappoint either with each recording 200% year-over-year revenue growth, too.
But by the final quarter of 2022, signs were evident that the tenor of revenue growth had changed. In the penultimate quarter of the year, the company reported 85% growth on annualized basis, before a sharp slowdown to 6.8%.
By the time the calendar had turned to 2023, revenue growth had turned red, and has fallen by 5.5% and 7.6% respectively in the first quarters of the year.
The slide in share price could not have been more severe with a 96.7% slide from all-time highs. Loyal shareholders who stuck with the stock through the highs and subsequent correction have been almost entirely wiped out.
But do they have anything to look forward to now?
What Does The Future Hold for Desktop Metal Stock?
The outstanding revenue growth over the 2021-22 period masked a sequential series of operating losses. Wall Street was able to forgive the losses while revenues were skyrocketing but the top line slowdown and subsequent slip into the red was punished, unforgivingly.
The selloff was not without justification. After all, the losses had a direct hit on cash levels and liquidity. In the final quarter of 2020, cash and short-term investments on the balance sheet amounted to $595 million. Fast forward to Q2 2023 and that figure has shrunk to $127 million.
Worse still, long-term debt has ballooned over that duration from zero to $112.4 million. With the company posting operating losses of $45 million quarterly, it’s no exaggeration to say that the future looks bleak for Desktop Metal. There is a real risk that the company runs out of cash.
Clearly, analysts are not optimistic about the company’s future prospects, either, with the majority forecasting the company will not be profitable this year.
But profitability and valuation don’t necessarily go together, so is there upside for DM shareholders?
Is Desktop Metal Stock Undervalued?
You might assume with falling revenues, operating income in the red, and analysts’ forecasts erring negatively that the future is bleak for DM but there is some hope on the horizon.
For one, those same analysts are upbeat about where fair value sits for the stock. So, if you’re wondering is Desktop Metal stock undervalued? According to five analysts covering DM, the share price has 105% upside potential to fair value at $2.50 per share.
Our own discounted cash flow forecast analysis puts fair value at $2.21 per share, slightly more pessimistic but still offering significant upside of 83.3%.
You might correctly wonder how a company can have poor free cash flow yield, appear to be quickly burning through its liquid cash pile, suffer from weak gross margins, and still have upside potential. The short answer is that at a certain price all the bad news has been baked into the share price, and that would seem to largely be the case for DM.
Will DM Stock Recover?
If you were to measure Desktop Metal on some key dimensions, the results would not look favorable. Profitability is poor, growth has reversed and gone negative, cash flows are not impressive, and share price momentum is downright dismal.
But in one key area, there is a glimmer of hope and that is valuation. The relative value of DM stock now is proving much more attractive than when it attracted a lot of attention a few years ago.
DM is now trading at 1.9x trailing twelve month sales, above its peer average of 1.3x and the sector average of 1.1x. Nonetheless, it’s a much more palatable figure than it had been when it was closer to being a $10 billion stock with around $20 million in quarterly sales.
Back then, the valuations were virtually off the charts. But these days, trading at a market capitalization of around $387 million, DM stock can offer shareholders some hope to cling onto.
With that said, it’s difficult to imagine a scenario where the share price ascends much higher than fair value anytime soon absent a takeover or acquisition.
Desktop Metal attracted hoards of attention at its peak in 2021, but a slowdown in revenue growth was accompanied by a loss of appetite among shareholders, who rapidly and punitively sold positions, driving the share price down by over 96% in just a couple of years.
With operating losses persisting and cash falling, the future is ominous for Desktop Metal shareholders, but if management can slow the liquidity burn, the valuation is starting to look more attractive.
Both analysts and a DCF analysis suggest that DM stock is undervalued at this time by 83% to 105% respectively. Still, it’s a brave investor who will bet on the company not running out of cash and realizing its potential at this time. Certainly, this doesn’t appear to be a stock to rush into with abandon.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.