Nano Dimension: Rich Potential, Poor Execution

Summary

• Nano Dimension Ltd. is a 3D printing company focused on producing specialized PCBs (printed circuit boards) with significant exposure to IoT (Internet of Things).
• A $2.5 billion market capitalization with less than $10 million in annual revenue, NNDM is deep in blue-sky territory.
• NNDM fails to provide evidence that it can successfully transition from low volume prototype supplier to mass market vendor, thus there remains little to justify its valuation level.
• Good news is that NNDM fundamentals have dramatically improved after a couple of equity issuances in 2020 and early 2021, which solves the cash burn issue for the time being.

Photo by Nikola Ilic/E+ via Getty Images

NNDM in a Nutshell

Nano Dimension Ltd. (NASDAQ:NNDM) is an Israeli technology firm focused on producing 3D printed electronics. NNDM supplies a growing demand for electronic devices that require sophisticated features and rely on encapsulated sensors, antennas, and printed circuit boards (PCBs). The company's PCB jet printer system is an inkjet deposition tool for fabricating multi-layer circuit boards outside of a factory setting. All in all, NNDM supplies hardware, software, print-head management tools and nano-chemistry for Research and Development (R&D), prototyping and custom manufacturing projects.

NNDM primarily supplies clients operating within the consumer electronics, medical devices, aerospace/defense, telecommunications and automotive industries. The bulk of NNDM’s business relies on hardware sales, with two thirds of the revenue coming from their DragonFly system ($350k per unit). Ideally, NNDM will transition to a true “razor-blade” model or shall I say “printer-cartridge” model, whereby the bulk of cash flows come from consumables and support services such as ink cartridges and software, respectively.

Figure 1. NNDM revenue breakdown in terms of source as percentages. (Source: Author Generated with Company Data)

Figure 2. Breakdown of NNDM’s geographic exposure as percentages. (Source: Author Generated with Company Data)

The true TAM for both 3D printing and IoT remains far from certain

3D printing has taken off over the last decade as the size and cost of machines have shrunk. 3D printing has the potential to revolutionize a litany of industries beyond prototyping, but the costs must continue to decrease. One such application, electrical systems, has vast replacement potential as 3D-printed electronics (3D PEs) are expected to revolutionize the way such systems are designed in the future. 3D electronics printing systems create 3D circuits by printing a substrate item layer by layer, then adding a layer of conductive liquid ink on top of it. Globally, the entire 3D Printed Electronics market is expected to grow at a CAGR of +39.50% during the forecast period 2020-2027 according to Data Intelligence. That said, NNDM is focused more specifically on 3D additive manufacturing (AME), which has a smaller expected CAGR of +24% for the next decade.

Figure 3. 3D printed electronics CAGR estimates by source. (Source: Author Generated with data from Data Intelligence, Grand View Research and NNDM Guidance)

The true total addressable market (TAM) of NNDM’s focus niche remains a big question mark. Looking to the comments of specialized technical blogs, NNDM could have its short term growth restricted to prototyping and small series production, while its long term potential as a viable mass production replacement technology remains up in the air. This is further evidenced by the fact that positive news from the company continues to be linked exclusively to successful prototype stories rather than broader adoption of its technology for mass production. The questionable viability as a true alternative would certainly help explain why the company has thus far failed to deliver more significant revenue numbers despite the significant overall size of the PCB industry ($71bn in 2021).

PCBs - From Wires to AME

Until the 1950s, electronic circuits were assembled using individual wires to connect each of the components. Then came along Dr. Paul Eisler, an Austrian scientist working in England who invented the first single-sided PCB that has since become industry standard. Within the vast $70bn PCB market, multilayer boards comprise the largest addressable market with 2-6 Layers (37% of the TAM) representing the largest subsegment.

Figure 4. World PCB production by type. (Source: TTM Technologies)

Traditional PCBs, however, suffer of many pitfalls; expensive production costs, inefficient production times (7-21 days turnaround), poor thermal conductivity and an etching process that uses hazardous chemicals which violate new environmental rules. As a result, alternatives to enhance this traditional process have surged over the past few years -- flexible circuit boards, printed conductive inks and pastes, as well as 3D printed electronics.

NNDM’s offerings are spearheaded by its flagship DragonFly LDM system and accompanying ink products. The DragonFly LDM system utilizes NNDM’s proprietary liquid nano-conductive and dielectric inks designed specifically to print multilayer circuitry and 3D electronics. The advantages of using the DragonFly LDM system are summarized as it follows:

• Users can avoid reliance on third-party manufacturers throughout their R&D cycles.

• Users can accelerate the traditionally slow time-to-market turnaround of advanced PCB prototypes.

• Users will have freedom to innovate and painlessly employ an efficient trial-and-error process.

• Users can enhance their IP security by keeping the R&D process in-house.

Figure 5. NNDM product offerings. (Source: NNDM Presentation)

NNDM notes in its annual report that rivals are taking a more general approach and do not specifically target PCB production. Furthermore, when competitors do target said market, they typically offer generic solutions that fail to add significant value for clients. In terms of PCB printing, NNDM claims to be two years ahead of the competition. Unfortunately, we should not discount that the reality could simply be that other 3D printing companies in the space do not envision the same opportunity within the PCBs niche as NNDM does, which would explain the lack of success the company has had in ramping up its sales.

While the company’s recent Q4 results substantially beat consensus revenue figures ($1.97mn vs $0.97mn Street), they altogether fell short of the bottom line expectations (-$0.20 per share vs $0.16 Street). Shares reacted positively to the results; however, the positive price momentum was short-lived and shares resumed their downward trend that began in February 2021. NNDM will need a big announcement around sales guidance for the shares to once again take-off in 2021.

An upbeat valuation case is reliant on viable transition to mass production

NNDM currently boasts a +$2 billion market capitalization alongside less than $4 million in revenue, a 5-year average cash burn of $10 million (negative cash from operations and free cash flow) and a string of dilution events dating back to 2013. On the brighter side, the last two secondary equity issuances in 2020 and early 20201 gave the company a negative net debt of $1.5 billion and provides enough cash to cover costs for approximately 5-6 years (assuming net cash outflows are in line with recent historical levels).

In the table below, I compare NNDM to other 3D printing firms. In terms of top line profitability and sales growth potential – NNDM does stand out among the crowd. However, when it comes to valuation and overall quality, the firm is a definite laggard among its peers. NNDM’s EV-to-Sales is particularly mind-blowing for a firm that barely touches $10mm in revenue, 550.4x vs their peers who average 60.8x. It should be noted, the 3D printing peers showcased below do not represent a set of direct competitors. By comparison, NNDM is targeting a unique niche (PCBs) and, as a result, we should not exclusively rely on this table when judging NNDM.

Figure 6. Relative valuation chart comparing NNDM with close public 3D printing peers. (Source: Author Generated with Bloomberg and Seeking Alpha Data)

Figure 7. Relative valuation chart as a percentile ranking of NNDM versus its public 3D printing peers. (Source: Author Generated with Bloomberg and Seeking Alpha Data)

Modelling a company like NNDM can be a real challenge due to its relative early stage and otherwise lack of meaningful revenue generation. This is yet another example of a publicly listed company that likely should have incubated longer in the private equity space. In any case, I have done my best to work toward a ballpark valuation range using a standard DCF model. My outputs factor in a reasonable set of scenarios for NNDM’s revenue ramp-up as well as its future profitability and cash flow generation profiles:

• A WACC of 7% is calculated from current debt and equity market values using Damodaran’s semiconductor industry information.

• 5 years’ sales growth of +24.5% CAGR. This is in line with 3D AME expectations compiled by the firm but is conservative when compared to expectations of +39.5% CAGR from Data Intelligence for the Global 3D Printed Electronics market.

• High sales growth over the next decade in conjunction with early penetration into the overall PCB market.

• Neither an expansion nor decline in profitability with NNDM’s operating margin converging towards 3D printer peer PRLB (Proto Labs) in the short term and mature peer HP Inc. in the terminal value portion (long-term) of the model.

• Long term growth rate of 2.5% and Equity Risk Premium of 4%.

The sensitivity table below contains output from a DCF model highlighting the stock price valuation (upper table) and the percentage of upside using a stock price of $8 per share as initial value (bottom table). The baseline scenario is highlighted at the center of the table.

Figure 8. Discounted cash flow model for NNDM valuation in terms of price per share ($). (Source: Author Generated with NNDM Data)

Figure 9. Discounted cash flow model for NNDM valuation in terms of percentage upside and downside from $8/share. (Source: Author Generated with NNDM Data)

My analysis concludes that NNDM shares do not offer a reasonable valuation case at their current price levels, not even for long term investors with a patient “private equity” mindset. For shares to become attractive for long minded investors, NNDM’s 5-year CAGR should be well above +84%, which is outside the range of most likely scenarios highlighted in the squared area of the DCF table. NNDM needs to demonstrate more successful penetration within the PCB industry by landing larger contracts. To do so, NNDM will need to break out of its current position as a prototyping tool and transcend to an instrument that can be viable for mass production. The overall lack of good news surrounding larger contracts is the primary hurdle holding NNDM back from becoming a real multi-bag opportunity.

NNDM Key Risks

NNDM is exposed to certain company-specific and industry-wide risks enumerated below:

• King of PCBs, for the time being: 3D printing is a fast-paced industry with an enticing growth rate that will surely attract future competitors targeting the PCB space.

• Low free float comes with liquidity risk: Only 18.3% of NNDM’s total shares are outstanding in free float as of 19th March 2021. A wide body of research draws connection between low free-float stocks and abnormal future negative returns. This effect is intrinsically connected to liquidity discount, a topic reviewed thoroughly by authors and economists like Damodaran.

• Mass production market challenge: NNDM sold a mere 60 units in 2020 and 50 units in 2019 of its DragonFly system. Each DragonFly LDM printer sells for $350k per unit with related recurring revenues from "consumables” (ink cartridges) and “support services" (software) representing the real cash cows. That said, NNDM is already pricing good news about mass production contracts that have yet to materialize.

• Lingering Covid-19 and supply chain crisis: NNDM activity is tightly related to the semiconductor industry, which of late has been experiencing serious supply chain constraints. Although industry insiders claim these difficulties should resolve before summer, there remain question marks (e.g. slow vaccine rollover) that could further fuel uncertainty.

• NNDM Dilutive Track Record: NNDM previously traded on the Israeli stock exchange, which ended poorly for its shareholders after multiple dilution rounds. The company has raised capital every year since 2013. That said, a significant funding round in 2020 seems to have put the company in a solid capital position for the years to come as Figure 10 indicates below. Many investors have been burned over the past few years because of the company’s never-ending growth promises, because of this, time is running out for management to deliver ‘the goods’ over the next few years.

Figure 10. Cash burn rate in terms of cash flow from operating activities (CFO) and free-cash-flow (FC). (Source: Author Generated with Bloomberg and Seeking Alpha Data)

Conclusion

NNDM offers a good hypothetical story bolstered by high-growth themes such as 3D printing and IoT. However, the potential remains raw and overvalued for investors looking to open a position at current valuation levels. NNDM’s primary weakness is a lack of traction landing larger contracts, which helps explain the firm’s anaemic top-line. NNDM’s current price does not provide a reasonable risk-reward trade-off for investors hoping to enter this 3D printing opportunity.

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. I have no business relationship with any company whose stock is mentioned in this article.