Nano Dimension: Substantial Mispricing Based On Negative Ark Sentiment

Summary

• The stock presents a deep value play based on substantial mispricing.
• The markets seem to have not caught on to this given the negative sentiment surrounding ARK.
• You are essentially buying a dollar for less than a dollar with an upside of around 40% even if we assume no growth.
• The CEO has also recently bought more shares which may signal an opportunistic entry point.

Phuchit/iStock via Getty Images

Introduction

Nano Dimension Ltd (NASDAQ:NNDM) is an Israeli-based provider of machines for the fabrication of AME (Additively Manufactured Electronics) and other AM (Additively Manufactured) products.

The stock currently trades for US$3.80, after a substantial selloff in 2021 which saw it plunge 78% from a high of US$17.70 in February to the levels that we see today.

Source: TradingView, Panther Research

The share price performance has also been closely tied to the performance of the Ark Next Generation Internet ETF (ARKW) and Ark Autonomous Technology & Robotics ETF (ARKQ), given the fact that Cathie Wood and the ARKQ Fund owns 3.46% of the shares outstanding with an average cost basis of US$8.06.

The significant underperformance of the ARK funds last year (down ~19%) and the associated negative sentiment with that decline may have contributed to the extreme selloff in Nano Dimension stock.

Although the valuations of the company were certainly frothy in the past, the current financials of the company (more specifically, the cash on hand, the pristine balance sheet, and the current EV) all point to a case of substantial mispricing that the markets seem to have ignored, which may reward early investors in this narrative.

TAM & Business Model

As mentioned above, Nano Dimension is an Israeli based provider of machines for the fabrication of AME and other AM (Additively Manufactured) products.

What exactly is Additive Manufacturing? Additive manufacturing is the process of creating an object by building it one layer at a time. It is the opposite of subtractive manufacturing, in which an object is created by cutting away at a solid block of material until the final product is complete. Usually, additive manufacturing refers to 3D printing.

For a simple layman's explanation, to create an object using additive manufacturing, someone must first create a design. The design is then sent to the 3-D printer, which begins creating the object immediately. There are many types of additive manufacturing machines catered to create different products. Nano Dimension’s Dragonfly printer prints circuit boards and electronic devices. On the other hand, its Fabrica printer prints micro objects.

Source: Investor Presentation

Currently, a large percentage of Nano Dimension’s sales comes from its hardware printers. However, like all printers, once a customer has bought a printer, he will need to continuously buy the printer’s “ink”. NNDM also has another avenue of recurring revenue coming from its service contracts.

Source: Investor Presentation

Insider Buying

On 14 December 2021, Yova Stern, Chairman and CEO, bought $500,000 worth of shares from the open market. Coming from a stock that has seen massive dilution of shareholders in the past, this may be the signal of an opportunistic entry point for those that have yet to pick up shares. Moreover, in a recent press release, Yova announced that:

"Recent events are encouraging. We have announced our new DragonFly IV system, combined with a breakthrough FLIGHT software, at the Productronica Show in November, 2021. Since that launch, we have already sold two DragonFly IV printers to a leading government defence supplier and European government agency, in addition to completing two beta sites with other leading customers."

Financials

Source: Tikr Terminal

Regarding the company's top line, Nano Dimension's revenue fell by 52% in FY20. Despite the loss, analysts expect strong near future growth of 150% in 2021 and 250% in 2022, with YoY positive estimates up to FY25 at a CAGR of 123.2%.

Source: Tikr Terminal

Although the company's EBITDA has also been negative for the past 5 years, analysts anticipate a turnaround with EBITDA projected to hit US$10M by FY23, representative of an EBTIDA margin of 20%.

Despite the rather bleak revenue and EBITDA picture as of now, the thesis of this article is not a fundamental deep value play. Some do anticipate the TAM of this industry to be massive and that it may be, but I want to highlight the discrepancy in the market value of the stock with the cash on hand, and that can only truly be appreciated when we look to the balance sheet.

The stock currently trades at a market cap of US$970M, yet has US$1.4BN of cash, cash equivalents, and short-term investments (STI) on its balance sheet, of which US$1.1BN represents the most liquid form of cold hard cash. With a total debt of US$3.5M and no long-term debt (LTD), the current debt levels are minute and do not represent any fundamental threat to the company's operations.

When we look to a more short-term metric, the Current Ratio (CR) & Quick Ratio (QR) of the stock both trade at 95X, given that inventories represent a very small % of the assets. Despite having negative EBITDA, the comparative Net Debt to EBITDA ratio is 22.8X, given the mammoth Net Debt of -US$1.38BN having already factored debt into account.

Nano Dimension currently also trades at a LTM P/BV of 0.66X, which essentially compares the market capitalization of the company to its net assets. Starting a position today is akin to buying the company for 0.66 on the dollar which presents a remarkable undervaluation, not on earnings but rather on net assets.

Given the above, coupled with the fact that the stock saw a heavy selloff, Nano Dimension currently trades at a market cap of US$970M but a joke of an EV of -US$400M, which stresses just how ridiculous the current valuation is. Though unlikely, but for the sake of perspective, if management felt like rewarding shareholders, they could essentially buy the entire company multiple times over. If they opt to do a share repurchase program (SRP) instead, they could buy 50% of the float and still have 1/3 of their cash balance left over.

Although Nano Dimension did raise the substantial cash on hand via share issuance at US$15/share, which caused massive dilution to existing shareholders, today's valuations are too far gone.

Furthermore, with a short interest of 8.4%, any positive catalyst, be it related to the fundamentals in the company or a turnaround in the performance of ARK's funds, could send the stock price significantly higher.

Risks

That being said, no investment, regardless of the thesis, is immune to market and idiosyncratic risk. One risk would be the fact that management continues to dilute investors and raises more cash through more share issuances, although the likelihood of that seems doubtful. The balance sheet is loaded with cash to deploy if any acquisition seems favourable. However, if Nano Dimension finds no other company to invest in, which was the original reason given to investors for the equity issuance, and continues to burn cash to finance their current operations without any meaningful revenue change, the EV will start to reverse and so will the mispricing opportunity.

Furthermore, this thesis largely banks on the hopes of management announcing a SRP to the benefit of investors, which may be the positive catalyst needed to reverse the recent downtrend. However, looking to history, it is evident that management intends to adamantly stick to their pitch of saving the cash for acquisitive opportunities, and not to reward shareholders given that they have yet to do so despite the significant selloff.

Valuations

Nano Dimension operates in the 3D printing industry, and its offerings and product portfolio are not obsolete in the slightest. There is no reason for the company to be trading with a smaller market cap than its cash pile. At the very least, its market cap should be in the range of its cash pile, and if this were to happen, it would be trading at US$5.50/share, representative of a 40% upside from its current share price.

Source: Tikr Terminal

If we were to use the P/S ratio, it also points to substantial undervaluation. Analysts expect Nano Dimension to have a revenue of US$63M by FY25. For the past 5 years, NNDM has traded at a mean multiple of 183X. If we were to use a more conservative multiple of 30X, the stock would have a market cap of US$1.9BN, representative of an upside of 93% from today’s share price.

Investor Takeaway

Because of continuous dilution, Nano Dimension has been brutal in its treatment of shareholders the past couple of years. Moreover, the company's business model, which banks on selling hardware, provides inconsistent revenue.

In addition, it operates in the field of 3D printing, and a case can be made for its product offerings to be adopted by many universities. If the company is also able to put their capital to good use, and acquire useful companies that can add meaningful value, it may command a much higher valuation in the future based on earnings.

Taking all the above-mentioned into account, and not forgetting the main narrative of this article, the current valuations for the company make little sense from all angles. The market seems to have neglected Nano Dimension due to its close relation with the Ark Funds, but the fact that it has been sold off so much, such that investors are able to buy a dollar of the company for less than a dollar, speaks volumes.

Therein exists a substantial mispricing that has yet to have been noticed by the general market, and early investors that allocate a small % of base capital (1-2%) for this speculative play may be rewarded handsomely. Just a single growth catalyst is needed, and if present, can turn the tables back in the hands of long-time bulls. Send it!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NNDM either through stock ownership, options, or other derivatives. 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.

Blockchain Technology, the Cryptoverse, and the equity markets are all inherently wild and speculative markets to be in. The technologies and technicalities can get confusing at times and I have done my best to deconstruct them for you. Should there be any mistakes, constructive criticism on any of my articles will be well received. Readers should also always exercise additional due diligence and consult a broker should they need to. Any material in this article should be considered general information and nothing is to be taken as investment advice.