Desktop Metals: I Like the Stock
If you’ve been following along with the themes that I’ve been covering in Nexus of Innovations you might have noticed common outcomes I’m tracking.
Exponential tech goes through cycles of breakthrough, development, hype, crash, consolidate, repeat. And, one area of tech that’s seen some of the biggest hype cycles and crashes is 3D printing or additive manufacturing.
Simply put, additive manufacturing “prints” an object layer by layer like a glue gun laying down layers of glue one on top of another. Except instead of glue, 3D printers can use plastic, metal, carbon fiber, human tissue, and even wood. You load the design blueprints into the machine and away it goes.
Sounds like magic, yes? That’s how we know it’s good tech! But, the 3D printing space has seen some of the biggest price swings up and down. It’s a key example of the innovation cycle that I mentioned above. Here’s a chart of 3D Systems, one of the largest pure 3D printing companies in the world.
One thing that stands out to me on this chart is that a 3D printing company went public all the way back in 1989! That’s pretty amazing. But, it also raises the question… where in the innovation cycle is this technology?
If you buy at the wrong time you could be holding an investment that’s down 65% for years. As an investor, I’d like to know where we are in the innovation cycle before I allocate money into this sector.
You can see that the last hype, crash, and consolidation cycle lasted from 2011 all the way to a bottom in September 2020. That looks pretty defined to me. So, the next question would be, has there been any innovation breakthrough that’s creating the spike we’re seeing on the price chart?
Price data, especially for early-stage tech companies, is a different metric than traditional value investing. These companies don’t have linear future cash flow growth. So, using the same metrics to evaluate a 3D printing stock as you would a mature blue chip such as Coca-Cola doesn’t make sense. Price data for an early-stage company like 3D systems (which only has a $3B market cap) is a better indicator of market sentiment than it is a change in actual future cash flows.
So, price data tells us when there’s shifts in sentiment. And, 3D systems had a big spike in January of this year. Have there been any big developments in the space that warrants a new cycle of breakthrough, development, or hype? If so, it could be a good time to start allocating some capital into this space.
For this article, I’m going to focus on a stock I own in my personal portfolio, Desktop Metals (DM). I like Desktop Metals more than 3D systems because they have similar market caps but DM has much more cash on hand (good for acquisitions), faster revenue growth, albeit from a smaller base, and has a more developed technology portfolio.
One of the most curious breakthroughs in 3D printing tech that I’m interested in is the use of sawdust and other “waste” materials from the logging and lumber industry to 3D print wood. It’s great to see innovations that create a more circular economy and upcycles (hint: it’s also deflationary! The more we can utilize already cut down trees and upcycle existing wood furniture to create new products means less trees in the future that need to be cut down).
In my opinion, the real edge that Desktop Metals has is in their printing technology. Here’s a slide from their Q1 earnings call deck comparing DM’s printing tech to other competitors in the industry.
DM’s printers print faster than any of their competitors by a huge margin, 3 seconds vs up to a minute + per layer! That’s a huge breakthrough compared to where printers were during the last hype cycle in 2011. The speed at which these new printers can operate takes 3D printing from useful for prototyping (which it still is) to mass production.
So, I believe that the 3D printing sector as a whole is now in the development phase. The breakthrough before being the application to mass producing products for the industrial and consumer world. So that means we might have 6-12 months where we’ll get to allocate money to this space before the next hype cycle where the price curve could go exponential.
DM has been smacked recently as the market has aggressively discounted growth stocks and early stage tech. But, I think this is a great time to buy. 2021 revenue for DM is expected to come in at over $100 million (growth of 400%). And, with the entire industry projected to grow at a 25% compounding annual rate for the next 10 years, the market size will double every three years. My bet is that Desktop Metals will capture a large percentage of that growth as 3D printing goes mass market.
I’ll be continuing to add shares on weakness and plan on holding for 10 years or more to ride this next cycle.
P.S. This is my 19th issue of Nexus of Innovations! Thank you for reading, commenting, emailing, and liking my posts. I’ve come to love sending out these issues each week. If you know someone who would enjoy reading this content every week, use the button below to share.