What a brutal six months it’s been for Desktop Metal. The stock has dropped 46.3% and now trades at $2.42, rattling many shareholders. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Desktop Metal, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Despite the more favorable entry price, we're swiping left on Desktop Metal for now. Here are three reasons why you should be careful with 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

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

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 $2.42 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 recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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