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Jul 5, 2021
[9 min Read]
First things first: Desktop Metal is a speculative buy that’s based on a macro industry movement called the Industrial Revolution 4.0. If you’re looking for a stock with strong earnings, PE ratios, and a history of revenue growth kindly fuck off on outta here.
If you’re looking for the next potential Carnegie Steel, this is about to blow your mind.
Desktop Metal is positioned to be a once in a generation type of company. Additive Manufacturing is a major part of Industry 4.0 that will entirely flip manufacturing on its head. Before I dive into Desktop Metal and why we all need to be bullish on this particular company, let’s briefly go back in time and take a quick history detour on how manufacturing got to where it is today and why additive manufacturing is the next giant leap forward. This information is paramount to understanding where Desktop Metal is and where they’re going relative to the industry backdrop. I will scatter some colorful and fun photos to help digest the information:
Subtractive - Prior to the industrial revolution, subtractive manufacturing was the primary way products were produced. Subtractive manufacturing is the process where parts of a block of material are removed until the desired outcome is created. Imagine you’re manufacturing something like a high-end violin. You would start with a block of wood from a spruce tree from the corner of the Italian Alps in the Fiemme valley and start carving away at it until you end up with violin-shaped parts. There’s a lot of waste and it takes a lot of time to carve out. Today, this process has been fully automated and produces highly refined products that can withstand long-term and high-stress usage. However, there’s still a lot of waste and the process takes a set amount of time per unit of output.
Forming - This is one of the most common processes for mass manufacturing today. A mold is created of the final product that is looking to be produced and that mold is filled by injection with the material, which then cools, hardens, and takes on the form of the mold design. This process is used for everything from metal products, plastics, glass as well as a variety of other materials. The major advantage of this process is the ability to produce thousands of identical parts at a low cost per unit. However, the downside is that injection molding is costly in terms of the time and money it takes to develop the mold. Once completed, making any changes requires an entirely new mold.
Additive manufacturing means the products are created by adding layer after layer. There are 7 main types of additive manufacturing, and Desktop Metal specializes in carbon fiber and metal manufacturing. The main benefits of additive manufacturing are:
Speed: Companies can now build prototypes and innovate faster than ever. Rather than using traditional means of manufacturing, with 3D printing companies, they are able to test their ideas in real time and make changes faster than ever. By doing this, companies can rapidly increase the speed at which they bring new ideas to market and quickly validate/invalidate ideas.
Cost: Compared with traditional means of manufacturing, the cost of printing objects is significantly cheaper and more efficient. Layer in the saved labor costs and the cost of innovating and scaling products can now be cheaper than ever!
Quality: During the manufacturing process, errors can easily be introduced that get amplified and can lead to catastrophic consequences. With 3D printing, you remove all of the manor labor and introduce new efficiencies that make products not only higher quality, but safer too!
Sustainability: Similar to the above, traditional manufacturing creates significant waste which can be improved via 3D printing. With also fewer parts, and more efficient designs, less energy is used too, creating a more sustainable, healthier and cheaper product.
The technology for additive manufacturing started in the 1980’s and was primarily used for prototyping. As it evolved, 3D printing transitioned into creating molds and tools for traditional manufacturing. In the last few decades, additive manufacturing has gone more mainstream to produce end-use parts. 3D printing is an innovative technology that lets you create a physical object from a digital model. All you need to do is make a design, transfer the file to a 3D printer, then bring your object to life. (Let's print a LAMBO!) Once printed, the 3D printer produces layers of material, one on top of the other. This forms the finished object. So, for example, instead of manufacturing traditional hardware, 3D printers can recreate the same finished products by designing it on a computer and just clicking print! Think of it similar to a traditional printer but instead of 2-dimensional, it is 3-dimensional, and can use other materials (not just ink - it can use metal, graphite, etc.)! The industry is expected to grow 11x over the next decade from $12 billion in 2020 to $146 billion in 2030.
Desktop Metal was founded half a decade ago in Boston. Their initial product was to develop a metal-printing 3D printer that could be small enough to operate within an office environment. Today, they have four products in its portfolio: Fiber, Studio System, Shop System and Production system. The Studio, Shop, and Production products support both the printing of both metals as well as fiber composites such as Carbon Fiber. DM’s flagship product is their Production system, built from the ground up to be the fastest 3D production printer in the industry at 100x the speed of laser based systems while keeping a consistent quality. They’ve pioneered a precise and rapid process to accomplish this speed through the following:
DM’s Production system has developed a more efficient process for the powder processing unit. The unit’s job is to deliver consistent metal powder across the printer and other systems do this by starting with a pile of material and then spreading it out across the print bed. DM meters out a constant rate of spread that’s dispensed and then compacted to produce the final print layer.
Once the powder is placed on the print bed, an anti-ballistic system to control powder as a binder is sprayed on top to prevent the powder from dirtying the print heads. This is where the geometry of each layer is created and it’s repeated layer by layer.
This process is made more efficient by developing an entire box full of parts at the same time and it’s capable of supporting multiple stacks of parts. The next step is called cross linking. The build box is put into an oven to activate the binder and creates the parts. At this stage, the parts are still in powdered metal form, but are strong enough to handle and move to the next stage called depowdering and centering. This is where the parts are put into an industrial oven and the powdered metal is heated until it forms a solid piece of metal in the shape of the final product itself.
Speed is only half the battle, consistency is the other half. DM’s prints with the most advanced industrial print heads available on the market at 1200 DPI and has a proprietary camera system that images every layer of every bed with two different angles of light to detect defects. If any problems are encountered, it’s automatically flagged and the operator is notified.
Another major advantage of DM that was incorporated from the ground up is that it uses an open powder system. What that means is a customer can use their own powders from traditional supply chains directly with DM’s production system. This open powder system means customer’s can develop a process that works for their business and the Production system can be adapted to fit. To make implementation even easier, DM produced a smaller R&D machine that uses the exact same software and steps to help businesses design a process, develop their product, and be able to quickly transition from R&D to full production.
The production system allows customers to do things that just wasn’t feasible previously. From a time and money perspective, it’s able to be highly competitive with traditional manufacturing methods, a feat that has previously not been possible in the additive manufacturing industry for metals and carbon fiber. This means that all of the benefits of additive manufacturing, the designs that are possible, as well as rapid iterations on the production are all now possible with DM’s Production system.
A major advantage for businesses is additive manufacturing’s capability to combine the number of parts needed to develop a single component. An example of this is back in 2016, Airbus was able to produce it’s fuel nozzles for it’s engines using additive manufacturing and reduce the number of parts from 20 to 1. This reduced the components weight by 25% (incredibly important for the airline industry) and reduced the assembly time.
On top of their hardware, Desktop Metal has pioneered an industry-leading AI-driven software for designing and modeling. This complementary SaaS product, along with secondary products like their printing cartridges, Desktop Metal’s business model positions them well to bring customers in and have a consistent revenue stream for years to come.
Today, Desktop Metal is one of the fastest growing unicorns in US history. Their 2020 revenue of 16.5 million USD is tiny compared to their valuation, but their growth has been tremendous. They only began shipping their Shop System and Production System in Q4 of 2020. Q3 of 2020 was reported at $2.5 million and rose to $8.4 million in Q4, a 236% increase. The company’s aggressive expansion strategy positions it well to take advantage of the growth opportunities that lie ahead. It’s projected to be around $1 billion in revenue by 2025, a 87% CAGR. As of now, the company has 90+ production systems on reservation, which means that they’re sold out until the first half of 2024!
Compared to their peers in the space, Desktop Metal as a stock can be considered relatively cheap and underpriced. With no outstanding debt and $600M+ on it’s balance sheet, there’s a wide cushion for the business to operate over the next few years to accelerate its growth and capture market share. This large balance sheet, something unheard of for a company of their size, gives them an unfair competitive advantage in the industry. This is just another one of many reasons Desktop Metal is poised to outperform over the long term.
On top of their existing suite of products, Desktop Metal has an aggressive strategy for mergers and acquisitions. They’ve already identified $2 billion of revenue across 60+ potential targets, with 10 of them in contact and under analysis.
Who else has skin in the game?
Over the last few years, institutional money has been rapidly coming into Desktop Metal with over 2/3rd of the institutional investors increasing their positions. Many of the big players are seeing the same trends and have begun taking a position within companies in the 3D printing space. Desktop Metal happens to be well positioned and from our analysis, underpriced for the time being. Some of the biggest and most innovative investors such as Aunt Cathie Woods at Ark Invest, Papa Chamath, and Google Ventures are currently holding positions within Desktop Metal.
Desktop Metal is a stock that has the potential to 10x or more in the next few years. It has an incredibly talented team helming the ship, a backlog of sales for the next 3 years, an aggressive M&A plan in place to continue to fuel its growth, and thus is well positioned in the market to capture the industrial revolution 4.0 wave.
And not only do they have the opportunity to execute, they're proving they can. Let's take a look at the numbers:
THIS IS UNHEARD OF FOR TRADITIONAL MANUFACTURING! Looking across their "competition" we all can see margins in the single digits and YoY growth in the single digits too. What this tells me is that DM is in a unique position to take significant market share from legacy players. When we see dynamic shifts like this unfolding, this becomes massive opportunities for us to partake in! While there are obvious risks (new entrants, anti-competitive practices, new laws, etc.) I am going long and hard with Desktop Metal.
DISCLOSURE: I am a random person on the internet with too much time. These are not 100% original thoughts, mostly a collection of things I have read. Maybe you want to hear it from Klaus Schwab? You know the German engineer fella and economist best known as the founder and executive chairman of the World Economic Forum.
Price Target: $30
Target Date: 6-10 Months (with potential for a shorter term swing)