Desktop Metal Falls To New Low
Shares of Desktop Metal NYSE: DM fell to new lows in the wake of the Q3 earnings report but it is setting up an opportunity for traders. The new low is driven more by short-sellers than results and the results are indicative of future growth. While the Q3 results were a bit lackluster, the underlying trends are very positive and point to accelerating growth in the current and future quarters. We will refrain from calling the bottom in this stock just yet but we do see a time coming, possibly soon, when short-sellers will want to get out of this stock. If the meme crowd gets ahold of the market, it could result in a quick triple-digit gain relative to the current price action.
Desktop Metal Falls On Mixed Results
Desktop Metal reported a very mixed quarter in which the $25.44 million in revenue missed the consensus estimate by more than 1000 basis points. The mitigating factor for us is that this is an early-stage growth company with small revenue and a revolutionary product so it is reasonable for there to be wide fluctuations. What we prefer to focus on, however, is that revenue grew more than 905% from last year and hyper-growth is expected for several years into the future.
More importantly, the company reported widening margins attributable to scaling that we like. The gross margin improved by 180 basis points to 16% GAAP and 27% adjusted with only one negative hanging over it. The company’s GAAP loss also widened and by an unexpectedly large amount but there is a mitigating factor as well. Desktop Metal completed the acquisition of three smaller companies that help cement it as a leader in 3D printing and other advanced manufacturing processes.
The guidance is also mixed but we see upside risk in the numbers. The company is expecting full-year revenue in the range of $92 to $102 million compared to the $105.75 million expected by the analysts. Regardless, the consensus is worth 459% of YOY growth at the low end and the outlook for next year is robust. The company just completed an upgrade that tripled its capacity in order to meet early demand for the P-50 printer.
Turning to the balance sheet, the company appears to be well-capitalized and in a good position to continue executing its growth plans. While cash balances have come down in the last year inventory and accounts receivable are both up and there are the acquisitions to consider. These investments in growth should begin to pay off as soon as the current quarter with cost-synergies and efficiencies of scale. The question is, will they?
The Analysts Are Holding Desktop Metal
Sell-side activity has been heating up in Desktop Metal but it may not come to a boil, at least not yet. The company picked up 7 analysts since the course of the year but the Marketbeat.com consensus rating is only a firm Hold. Within that, the consensus price target of $20 assumes nearly 200% upside for the stock but there is a caveat. There is a wide range of price targets including 2 bears and the low target is close to $7.
The Technical Outlook: Short-Selling Weighs On Desktop Metal
Shares of Desktop Metal have been trending lower since hitting a peak last spring and it may be about to move even lower. This move is being driven by short-sellers and may present an opportunity for investors. With shares trading at such low levels and the outlook for growth still robust the stock will hit a bottom. When it does, if the shorts are still in control, the stage will be set for a rebound and short-covering rally if not an outright short-squeeze. We will not be surprised to see Desktop Metal reach meme status.
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