Hi I'm Troy McClure. You may remember me from such due diligence as 'Why Desktop Metal is Better Than Punk Rock' and 'Look, Ma – No Hands!' . I'm here today to talk to you about why some bags are from the grocery store, and others are Louis Vuitton. A lot has changed in just a few days.
As we know, the past six/seven months has taken its toll on the market, with even blue chips and darlings like AMZN, NFLX and FB getting hammered to 52-week lows and beyond, while post-COVID IPOs and SPACs have been getting absolutely eviscerated for even longer – many losing upwards of 80%. However, I firmly believe that in this indiscriminate market there are babies being thrown out with the bathwater, and a small number of those babies happen to be heirs to vast fortunes. And that's why I'd like to continue to bring your attention to Desktop Metal (NYSE:DM).
OH GOD, NOT THIS AGAIN… WHAT NOW?!
This past Tuesday, the company reported its 2022Q1 earnings before the bell. Revenue grew 286% from 2021Q1 to $43.7M, they finally commenced the shipments of its flagship P-50 production system to Stanley Black & Decker (and others who wish to remain out of the spotlight), launched the industry-leading Einstein and Flexcera series of printers under its sub-brand Desktop Health, installed a P-1 production system into a hyper scale manufacturer in China, launched the all-new S-Max Flex for affordable and scalable digital sand casting and reaffirmed full year 2022 guidance of approximately $260 million for revenue, representing 131% growth from 2021, and approximately $(90) million for adjusted EBITDA with the view to be adjusted EBITDA breakeven/positive by the end of 2023. The company also disclosed cash, equivalents, and short-term investments of $206.5 million as of March 31, 2022 – reaffirming an excellent cash runway and cited an extensive backlog of orders due to such high demand for their products in all areas of their operations.
So how did the market greet this excellent turnout? The stock dumped -64% in one session. But why? Well, the company also issued the proposal of $150M in Senior Convertible Notes. What is that I hear you cry? Well, it's essentially a debt raise. The company seeks private transactions with institutions to secure funding in exchange for either full cash repayment (with interest), stock, or both – in this instance due in 2027, or on the achievement of certain performance requirements.
But why would a company with such consistently huge growth and a big enough cash runway to reach profitability comfortably need such a thing?
Well, I believe the answer is very simple – inflation has skyrocketed and the Federal Reserve is relentlessly pursuing it by raising interest rates. Higher rates = more accruing interest = more overall debt. However, elevated inflation = faster currency depreciation = less future debt to repay in real terms while also securing their future by providing a contingency plan for unforeseen circumstances and/or opening the door to huge growth investments. When probed by an analyst about this in the Q&A, CEO Ric Fulop cited that they cannot comment on the use for this debt under securities laws, which suggests that the possibility that the company is once more pursuing the takeover of yet another competitor or complementary business. Further to this, I reached out to IR and was told a comment would be made once the transaction had closed. Make no mistake, this company would be fine without this with such consistent and aggressive growth – its simply a wise move right before the boat leaves the dock, and it opens a lot of doors. In fact, the CEO has historically been incredibly defensive about this company in both his words and his actions, and therefore a takeover of $DM either through hostile or agreeable means appears firmly off the table.
WE GET IT, THEY'RE DOING FINE. 3D PRINTING IS THE FUTURE. BUT ISN'T THE FUTURE CALLED THE FUTURE FOR A REASON?
Actually no. Last Friday, President Biden announced the launch of a new initiative, 'AM Forward', which aims to help strengthen supply chains and re-shore key manufacturing capabilities to the United States through supporting the adoption of additive manufacturing (AM) among small- and medium-sized manufacturers. Investments in new 3D printing machines and computer modeling hardware and software usually means taking on heavy debts and financial risks, and therefore their customers both big and small have more difficulty incorporating or qualifying additively produced parts in their own designs. This is where the government comes in. It's an agreement between large manufacturers (such as GE, Lockheed, Raytheon, Siemens Energy, Honeywell, and Northrup Grumman) and their U.S.-based suppliers to invest in new additive machines, help train their workers, provide technical assistance, and agree to participate in standards development. Most importantly, the manufacturers are supposed to provide 'demand signals' – which means they promise to buy stuff. GE Aviation says it will target U.S.-based SMEs for 30% of its total external sourcing of additively manufactured parts, Raytheon Technologies will seek SMEs for 50% of parts manufactured with AM, and Siemens Energy will target 20-40% of its sourced AM Parts. The AM Forward initiative will leverage the U.S. Department of Agriculture’s Business and Industry program, as well as the Export-Import Bank’s new domestic lending program and the Small Business Administration’s 504 loan program to help these firms and other SME metalworkers finance the new equipment. The program also includes providing training and technical supportfrom a multitude of organizations.
This is unquestionably a seismic shift in manufacturing and the beginning of the rise of additive over subtractive manufacturing. Everything from the creation of tools to car chassis, artwork to toys, rocket engines to smartphones, and even wooden furniture to replacement body parts is now firmly being disrupted – and Desktop Metal unquestionably holds the industry leading pure-play portfolio of products, IP and integration/distribution/upselling structure. The impact of this in even just ten years is cannot be overstated, and in the far future the scope of this technology with such backing and growing widespread adoption is simply unfathomable in the same way that an iPhone would be to Alexander Graham Bell, or the internet of today would be to Alan Turing.
WHAT ABOUT THE CRAYONS?
Well, its not surprise to see we're oversold on just about every single timeframe and firmly gapped down outside of the Bollinger band on exceptionally huge volume both yesterday and today, breaking five months of consolidation and support levels. Today was extremely stable and green, but macroeconomic conditions/concerns remain elevated following the CPI release, ongoing supply chain issues, rising costs of living and the ongoing war in Ukraine. But trading at $1.44 and a market cap that's simply 2x forecasted 2022 earnings is absurd – and that's not even factoring in the value of the newly-acquired ExOne Company last year being over $100M higher than the current market cap of both combined. I think the rest of the week will be volatile, but an excellent opportunity for short, medium and long term plays and the start of a new uptrend. It was a no brainer before, but I really believe this is the fire sale of the century. It's a true Peter Lynch moment for those brave enough to hold out.
The stock is currently trading at $1.44 with a public float of just 215.55M shares (of which 40% is institutionally held) is over 11% shorted publicly (which is only as of April 30th and likely multiples higher today) and as of this week is 70% shorted through dark pools, which goes a long way to explain the 1000%+ uptick in volume – dwarfing any previous trading day by multiples – and the stock's obliteration to the downside. Therefore, the float can now be easily swallowed up, and this potentially sets the grounds for an epic squeeze to rival GameStop's 2020/2021 run, and you won't be left with a steaming hunk of afterwards. In my opinion, this market presents only two plays – value, or hyper growth. Value comes with the trade-off of limited in returns while hyper growth couldbe exponential. I really believe this is the end of the dominance of big tech as we have known it since the Great Financial Crisis, and that disruptive innovation is the way of the next cycle.
Let me know what you think about this. I really believe this is the golden opportunity, and I am still accumulating with a target of $15 within 12 months, c.$130/s in five years and $830/s by 2030. To me, there is no sell – only buy.
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