Nano Dimension: Capitalizing On Additive Manufacturing Weakness (NASDAQ:NNDM)

Nano Dimension’s (NASDAQ:NNDM) stock has been fairly range bound in recent years, but the company’s large cash balance positions it to create significant shareholder value. Nano Dimension’s core business is growing, and its margins are improving. The company is also implementing cost cutting measures which should move it closer to breakeven over the next 1-2 years.

The outcome for shareholders is likely to be dominated by capital allocation decisions though, as Nano Dimension still has a large amount of cash and a negative enterprise value. Additive manufacturing weakness is likely to present Nano Dimension with an opportunity to acquire peers at depressed valuations, although there may not be any willing sellers, meaning Nano Dimension will have to bide its time.

The big change since I last wrote about Nano Dimension, is its recent round of cost cutting. This indicates a genuine desire to create a sustainable business, something that is yet to really be reflected in the company’s share price.

Nano Dimension Business Updates

Nano Dimension continues to push product innovations, the importance of this is unclear though. Recent product updates span Nano Dimension’s hardware, software and materials. While the company has achieved strong growth in recent years, this has largely come through acquisitions, and it is unclear how much demand there is for Nano Dimension’s core 3D printing technology.

The most important product introduction is probably INSU 200, a dielectric printing material. It is a jettable ink with improved thermal and mechanical properties, which potentially opens up new applications for Nano Dimension’s technology. Materials remain one of the bottlenecks to adoption in PCB applications.

Nano Dimension is also trying to embed AI in more of its solutions. The company recently filed a patent for large language model analysis of data generated by industrial machines. Without far greater scale it is difficult to see Nano Dimension’s AI initiatives having much of an impact though. In this regard, an acquisition of an additive manufacturing company with a large installed base of printers could be desirable.

Acquisition Targets

The primary focus of investors should be on Nano Dimension’s cash balance and how the company plans on using it. While Nano Dimension has been forced into a share repurchase program as a takeover defense, the company’s priority still appears to be M&A.

Nano Dimension’s commentary suggests that the company continues to pursue acquisitions but is yet to find the right fit. A number of public additive manufacturing companies are coming under increasing financial strain though, which could eventually provide an attractive opportunity. While outside financing remains an option, it is not clear that all of these companies have a viable path to profitability.

Nano Dimension has previously stated that it has 3-5 acquisition opportunities ahead of it, with two of those being very large companies. The company has also pointed to additive manufacturing companies that lack the gross profit margins to support the necessary investments in R&D and sales and marketing, presumably referring to either Velo3D (VLD) or Desktop Metal (DM).

Any acquisition is likely to focus on synergies with Nano Dimension’s existing business or creating a company with scale. Nano Dimension’s use of DLP technology could make Desktop Metal an attractive target. The company’s ceramic technology and AI solutions could also benefit from an acquisition of Markforged (MKFG).

Nano Dimension also continues to pursue Stratasys (SSYS), stating that its discussions with Stratasys are serious. This acquisition is likely focused on Stratasys’ distribution capabilities and creating a company with sufficient scale to achieve profitability.

Financial Analysis

M&A has been the primary growth driver for Nano Dimension and without any recent material acquisitions, growth is beginning to taper off. Revenue increased by approximately 19% YoY in the fourth quarter to 14.5 million USD. I expect growth to be weak in 2024, which is important as Nano Dimension is still some way off of profitability, even after recent cost cutting efforts.

Nano Dimension’s gross profit margins have been fairly steady in the 40% range over the past 12 months. While gross margins have been improving, a transition to bottom line profitability will be dependent on operating expenses.

R&D and general & administrative costs are driving Nano Dimension’s operating expenses. R&D expense is primarily related to headcount and subcontractors. General and administrative expenses were driven by professional services in 2023.

Nano Dimension recently engaged in a major round of cost cutting which could indicate that the company is serious about creating a viable business. In particular, Nano Dimension’s global headcount was reduced by approximately 25%.

Nano Dimension is targeting 25-30 million USD in annual cost savings, which should show up in the financial statements beginning in Q1 2024. Net cash burn in 2024 is anticipated to be 12-20 million USD and Nano Dimension is targeting positive free cash flow in 2025.

Conclusion

Nano Dimension has already repurchased 96 million USD of its stock and recently commenced a second program for up to 200 million USD. This hasn’t had much of an impact on the share price though, despite Nano Dimension having a negative enterprise value.

If Nano Dimension can continue to drive growth and cost cutting efforts pay off, its enterprise value should increase, independent of stock repurchases. I am skeptical about the company’s growth prospects though.

The big question is whether Nano Dimension can complete an acquisition that creates synergies and helps the company achieve profitability. There don’t appear to be any willing sellers, but financial pressure is mounting on several companies.