Desktop Metal has gotten torched over the last six months - since August 2024, its stock price has dropped 36.3% to $2.62 per share. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Desktop Metal, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why we avoid DM and a stock we'd rather own.
Why Is Desktop Metal Not Exciting?
Originating from a research lab at MIT, Desktop Metal (NYSE:DM) offers 3D printers, production materials, and software to many industries.
1. Revenue Tumbling Downwards
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Desktop Metal’s recent history marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 2.4% over the last two years. 
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Desktop Metal’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 103%, meaning it lit $103.30 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Desktop Metal burned through $84.07 million of cash over the last year, and its $120.7 million of debt exceeds the $46.03 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Desktop Metal’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Desktop Metal until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Desktop Metal’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at $2.62 per share (or 0.4× forward price-to-sales). The market typically values companies like Desktop Metal based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d suggest looking at the most dominant software business in the world.
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