Nano Dimension: The Risk Of Further Dilution Remains High

Summary

• We believe that the upside in Nano Dimension is limited at this stage.
• It’s safe to assume that by trading at a price-to-sales ratio of over 70x, the company’s future growth is more than priced in at this stage.
• The possible stock offerings in the future are making Nano Dimension's stock less attractive in comparison to other stocks on the market.
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This article was amended on 4/2/2021 to reflect adjustments to the phrasing around dilution.

Photo by Михаил Руденко/iStock via Getty Images

We believe that the upside in Nano Dimension (NASDAQ:NNDM) is limited at this stage. Our major concern with the company is that by trading at a price-to-sales ratio of over 70x, its future growth is more than priced in at this stage. On top of that, due to the capital-intensive nature of its business, Nano Dimension is likely going to continue to lose money each quarter and won't become profitable anytime soon. In addition, the possible stock offerings in the future are making the company's stock less attractive in comparison to other stocks on the market. For those reasons, we believe that it's better to avoid Nano Dimension stock at the current levels.

More Losses On the Way

Nano Dimension is an Israeli-based company that develops and sells 3D printing solutions mostly to defense agencies and big organizations. It's the first company in the world to develop an in-house 3D printer that's able to print multilayer PCBs (printed circuit boards). At the moment, Nano Dimension's flagship AI-powered printer is called DragonFly, it was developed in 2019, and it has a price tag of ~$250,000 to ~$350,000. The biggest advantage of DragonFly is that it's able to replace traditional PCB manufacturers and prevent the theft of intellectual property since there's no longer a need to send the data about PCBs in digital formats to factories in China.

In addition to selling printers, Nano Dimension is also able to make money by providing fabrication services, which include designing, prototyping, and production of chips for third parties. On top of that, Nano Dimension also sells proprietary conductive inks, which create an additional income stream for the business, since DragonFly customers can only use Nano Dimension inks in order to use the printer.

While Nano Dimension has a promising technology, its biggest downside is that it's still in its early stages of development, and as a result, it has been suffering significant losses in recent years due to the capital-intensive nature of its business. While its Q4 revenues of $1.97 million were flat Y/Y, its R&D expenses during the period increased to $3.72 million from $1.53 million a year ago, while its net loss in Q4 was $17.44 million. In addition, its revenues in FY20 declined Y/Y to $3.4 million, while its losses for the year were $48.5 million. Considering this, it's safe to assume that while the company doesn't hold any long-term debt, it should be considered a risky investment as it will continue to lose money in the foreseeable future.

Another downside of Nano Dimension is that the company is richly valued. Currently, the value of the printed electronics market is forecasted increase to from $592 million in 2021 to $2.4 billion in 2025. Considering that Nano Dimension trades at a market cap of ~$2.1 billion, it's safe to assume that all the near-term growth is already priced in into its stock, so its upside is limited. In addition, while DragonFly can replace traditional manufacturers of PCBs, its high price tag makes it easier for companies to continue to use cheaper and more viable solutions to create printed circuit boards. For that reason, there's a high chance that DragonFly will remain a niche product in the foreseeable future.

On top of all of this, the biggest downside of Nano Dimension is that it has already executed dozens of stock offerings in recent months, which diluted its shareholders and increased its share count by over 3000%. Considering that Nano Dimension has a net margin of -1426%, it doesn't generate a positive FCF, and it hasn't leveraged its balance sheet to this day, it's safe to assume that another stock offering could be executed later this year since it's very unlikely that the business will become profitable anytime soon. What's even worse is that in the last five years Nano Dimension's stock has dramatically underperformed against S&P 500 and we don't see how it'll be able to improve its performance anytime soon. With a price-to-sales ratio of over 70x, Nano Dimension is already significantly overvalued and we find it hard to justify a long position in it at this stage.

Chart: Seeking Alpha

Considering all of this, we believe that it's better to avoid Nano Dimension, as several risks make its upside limited at the current price. The company is already richly priced, there's a high chance that it'll continue to lose money due to the capital-intensive nature of its business, and the possible dilutions in the future are making its stock less attractive in comparison to other stocks on the market. In addition, the rise of treasury yields will lead to the rebalancing of institutional portfolios from growth stocks to value stocks, so there's a high risk that Nano Dimension will continue to depreciate in the near term. For those reasons, we have no position in the company.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[stellacosmos]

I did not see Nano buying Deepcube but I enjoy the reaction the market is having in the rising stock price.

[Shoeboxer]

While I do appreciate bearish articles for their attempt to challenge biases, it’s kind of hard to take seriously someone who in 2018 was bearish on Square, a year ago was bearish on Zoom and recently wrote a bearish article about Palantir.

[User 49822328]

@Hallmarkius

I bought the stock around $3, sold it around $12 since a capital raise seemed to occur on most major rallies. It's an interesting product, but a terrible stock.

[Addy1992]

@User 49822328 oh good
When you buying again

[User 49822328]

@Addy1992

I personally wouldn't look at the stock again unless the company made it clear it's not going to keep doing significant dilution. Maybe when they are able to better operate under their own revenue.

[57starchief]

This article was written by one number cruncher outside the industry. The DragonFly does not aim to replace the large industry of PCB manufactures. The DragonFly is not a disruptive technology. It has been producing printers of over 4 years and improving them with each iteration. The idea that it will prevent the theft of intellectual property is lame. The DragonFly makes a printed circuit board. It does not make the IC’s that go on the board. It does not program micro controllers. If you are sending your boards to China you are likely to want 100-10,000. The DragonFly adds a solution at the edge of the function of a printed circuit board.
One solution is that it can print multi-layers and print capacitors and resistors in the interior layers. This frees up area on the top and bottom for component placement. Also, one does not need a pick and place machine placing components and then running the pcb through a reflow oven. Second solution is the Dragonfly is ideal for printing antennas on the PCB. Antennas need to be tuned once designed to broadcast efficiently – enter the DragonFly. This finds application in satellite communication to mention only one example. Third solution is flex circuits. Fourth solution is capacitive touch screens like the one you have on your phone. The fourth solution is planar transformer windings embedded into the circuit board. This is a big niche for power supply manufactures if the new line of printer can reduce the nozzle over spray.
Other revenue mentions are the Nano conductive and dielectric inks that must be used with the DragonFly. This is “sell the razor” and make money on the blades. This is easy to understand, EPSON and HP do it.
You send them your Gerber’s and they will print a board for you and send it back to you. This is a good business. However, “which include designing, prototyping, and production of chips for third parties.” Please, Nano is not in the business of making IC’s nor does it design your PCB for you.
The dilution of stock is a drag. OK it is done. In a way the Pandemic pause could be a good thing if a better printer is developed. What is Nano doing with the funds?
Have you invested in a Hypot tester for the boards you send out to customer’s. All you had was a 9volt multi-meter. Can you test for inductance of your coils. What are enabling engineering improvements that Nano has made by moving to the new Florida facility. Marketing talk about being closer to the market is not a listening.
Can you solder to the PCB with slightly higher temperatures? Have the INKs improved?
Let’s talk of performance improvements instead of SPAC’s. What will the new printer offer?
Long and holding, though one more equity offering and I am out. Late fall should see some traction.

[thedukeoforange]

CEO said no more dilution; shareholders just gotta trust him. ;-)

[hanging chad]

There are many comments that are critical of this article without being specific. I would not have made the same points as the author but I would like to express my concerns about some of the ideas floated in these comments. Commenters have complained that: 1) the potential for future revenue is not recognized by the author and 2) the author has not accounted for the value of cash held by the company. I think that investors should seriously consider Alexaway's comment here. Dragonfly is not a disruptive technology that will displace current circuit board manufacturing for high volume board manufacturing. Dragonfly is cool but the total addressable market is just not there. It is a niche player for prototyping and very low volume manufacturing. Regarding the cash, the expectation is that the company will develop new applications that are much more profitable or acquire other companies and turn them into high profit products. In other words, invest and hope a miracle happens. The investment thesis seems to be that 3D printing is a disruptive technology that will displace current processes and therefore success is guaranteed. So far, as a mechanical engineer, I do not see where 3D printing results in a superior end product or produces at such reduced costs to make it highly attractive. There are certain niches where it fits nicely but that doesn't really describe a disruptive technology.

[LJKay]

@hanging chad , sometimes arguments are so horrible and so poorly founded that it isn't as simple as pointing out a mistaken argument or two. Sometimes, not only the argument but the whole worldview that undergirds the argument is terribly flawed. When you speak with a flat-earther, you need to go beyond their arguments to address their whole worldview from which the arguments flow forth. This article was written by the stock market equivalent of a flat earther and just as most people roll their eyes at flat earthers and walk away without getting into a debate, that's what most people are doing here. The person who believes the earth is flat pretty much knows nothing about the world and the person who thinks this article made a argue argument against NNDM has done no research into the company. Such people are better off being ignored and chuckled at, not justified by speaking to them as though they were adults who did due diligence in their research.

[bshab]

Geez... the comments section is vitriolic. Good article, I agree that it’s market cap is over valued at this point. Will keep this stock on my watch list

[beeninawhile]

@bshab you obviously have done no work to come to that determination. Good luck on anything you research. You will need it. Sheesh

[TheeSoluution]

One of the worst write ups I've seen in SA also

[Goldseverum]

This might be the most uninformed article I've ever read on Seeking Alpha. Usually shorts are well researched, this guy got it all wrong. Sad writing!!

[AlexAway]

“The biggest advantage of DragonFly is that it's able to replace traditional PCB manufacturers”

You most probably don’t understand what traditional fabrication of PCBs is. Millions of PCBs are printed for as low as 10’s cents each, equivalent cost. Output of million of PCBs may be as fast as 2-3 days. 3d printer has nothing to do with mass production. It’s absolutely not designed for this aim and does not have capabilities to print at low cost. Either, it does not have scaling capabilities. Search for PCB manufacturing to see how it looks like.

[Gilles Lesire]

It is a 600 million dollar company with 1.5 Billion in cash to accelerate growth. Honestly I am surprised by the PE of 70, that is much lower than I expected after all the previous dilution. And with the 1.5 B in hand this number will decrease rapidly.
Sure, there is still risk, but show me a stock with zero risk.

[tonyw10]

Your analysis is badly flawed. I almost stopped reading after the first couple of paragraphs. When comparing price to sales you should have deducted the cash in hand, over $6, from the price. Please learn the basics.

[Franfran]

@tonyw10 I agree, the fact that they have diluted a lot it means they have plenty of cash and no need to further shares offerings. Having said that I am not bullish on the stock at these levels.

[beeninawhile]

@tonyw10 I did stop reading. So sick of escalating short positions followed by bullshit SA articles written by those shorts. The market has become dirty with this contingent

[Vijoyanto]

hahaha......he might have open big short here idiot.

[Addy1992]

Thanks for your great article lol

[Addy1992]

I will buy more tomorrow

[tbk4200]

Laziest attempt at spreading FUD I've ever seen.....just embarrassing.

[aaxel]

Orchestrated attempt. Think I'll buy more.

[Chance888]

You just can’t make this kind of stuff up - oh, wait...

[Nomadic Investing]

Honestly why is the bar for bears so low?

[ZachMoney]

This was a poorly researched article.

[grocklein]

What's the price to sales ratio of a $1.5B pile of cash?

[beeninawhile]

@grocklein haha