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3D printing startup Desktop Metal (NYSE:DM) has gotten itself into a jam. The firm previously raised hundreds of millions of dollars from well-known investors including Google Ventures (NASDAQ:GOOG, GOOGL) and Ford Motor (NYSE:F). However, Desktop Metal has struggled to commercialize its technology, and the value of DM stock has collapsed 82% over the past 12 months.
Yet, even after this steep fall, things could still get worse for shareholders. That’s because the company’s technology has yet to prove it’s ready for primetime, and Desktop Metal’s balance sheet is shaky, forcing it into dilutive financing arrangements.
This combination could prove dire for DM stock holders.
A Missed Opportunity
What’s really unfortunate for Desktop Metal is that this should have been the year for 3D printing. With the brutal supply chain shortages, it was a golden opportunity for 3D printing companies to come up with tailor-made solutions for factories. Being able to print parts on site would have been a game-changer during the height of the pandemic-induced supply chain chaos.
Desktop Metal did manage to grow its revenue by 583% in 2021 to $112.4 million. But the company only booked a gross profit of $18.3 million on those sales. This shows Desktop Metal had minimal pricing power despite the seemingly ideal conditions in which to sell its products.
Meanwhile, the company’s cost of sales roughly tripled last year to around $94 million, and general and administrative costs nearly quadrupled to $78 million. Generally, you’re having issues with your business model when you spend more on corporate overhead and sales than you generate in revenue.
Balance Sheet Problems Intensify
Desktop Metal’s net loss skyrocketed from $34 million in 2020 to a loss of $251 million over the past 12 months. That’s a cool quarter of a billion dollars right there.
With that in mind, it’s worth noting that Desktop Metal had just $206.5 million of cash and cash equivalents left as of March 31. At a loss rate of $251 million per year, that remaining cash would run out in about 10 months, or by early 2023. And given Desktop Metal’s low and sinking share price, raising large amounts of capital through the stock market looks increasingly implausible for the company.
Thus, it has resorted to convertible debt financing to try to fill the gap. Desktop Metal issued $100 million of five-year convertible bonds at a 6% interest rate in May. A 6% interest rate may not sound too bad at first. However, the bondholders will also have the right, starting in 2026, to convert their bonds into DM stock at an initial conversion price of just $1.66 per share.
This means that Desktop Metal is having to pay a fairly high interest rate to access a mere $100 million. That would fund less than six months of the company’s operating losses at present. And in return for getting this loan, if Desktop Metal manages to turn things around, shareholders will get hit with lots of dilution at a low stock price.
Adding insult to injury, Desktop Metal shopped $150 million of these bonds but only found buyers for $100 million worth. Even with such generous terms for the bond purchases, market demand was lacking.
DM Stock Verdict
Desktop Metal’s combination of wafer-thin profit margins and sky-high corporate overhead just isn’t going to cut it. A year ago, the market was willing to fund this sort of speculative company with large operating losses. Times have changed.
Desktop Metal needs to rapidly slash overhead before it runs out of remaining cash. Even if it does so, it’s still unclear if the company’s technology has sufficient market fit to prove commercially viable on a significant operating scale.
For investors that want exposure to the 3D printing industry, there are safer alternatives than Desktop Metal. Graphics software companies like AutoDesk (NASDAQ:ADSK) and Adobe (NASDAQ:ADBE) are particularly compelling options since they make tools that facilitate the design and manufacturing of goods using 3D printers. In this way, regardless of which 3D printing manufacturers win out, an investor stands to benefit.
DM stock, on the other hand, is an incredibly risky bet. Investors may lose what’s left of their funds in Desktop Metal given the company’s elevated cash burn.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.