Nano Dimension: Biding Its Time (NASDAQ:NNDM)

Nano Dimension (NASDAQ:NNDM) is an additive manufacturing technology company with a long history but limited commercial success. The company wisely took advantage of a ridiculous valuation in 2021 to raise a large amount of capital, most of which still sits on the company’s balance sheet. Nano Dimension has since been pursuing growth through M&A, initially focusing on its core electronics manufacturing market.

The company now appears poised to branch out and begin consolidating the additive manufacturing market, having already unsuccessfully targeted Stratasys (SSYS). Ongoing macro headwinds and depressed valuations across the space make this an attractive time to be a buyer. Most potential targets are unlikely to be uncooperative though, unless staring down the barrel of bankruptcy.

Nano Dimension’s market capitalization is well below its net cash position, reflecting investor concern about the company’s ability to deploy cash effectively and eventually reach breakeven. This looks like a fair assessment given Nano Dimension’s poor track record, reliance on M&A to drive growth, and large losses.

Market

Nano Dimension believes there are a number of secular trends supporting its business:

• Reshoring of manufacturing
• Digitally secure manufacturing
• Mass customization

These are among the commonly cited reasons supporting the adoption of additive manufacturing, along with rapid prototyping, design flexibility, and the ability to produce more complex parts. Despite this, additive manufacturing remains something of a niche technology due to its limitations.

A lack of adoption has been a particular issue for Nano Dimension due to its focus on precision additive manufacturing. The company has developed 3D printers that are capable of very high resolutions using conductive and dielectric substances, allowing the company to target the production of Printed Circuit Boards (PCBs).

PCBs are used to connect components together in a circuit. They are constructed from conductive and insulating layers, with the circuit etched into the conductive layer. These conductive layers are laminated onto layers of non-conductive substrate. Electronic components are then attached to conductive pads on the outer layer.

The global printed circuit board market size was valued at 82 billion USD in 2022 and is expected to grow at a 5.6% CAGR growth rate through to 2032, reaching 141 billion USD by 2032.

PCBs can be produced using 3D printers by either printing the circuitry directly with conductive materials or printing a circuit board with hollow channels that are subsequently filled with conductive materials. Producing PCBs through 3D printing offers a number of advantages:

• Faster prototype design cycles
• Increased design freedom
• More layers
• Greater production accuracy
• Reduced waste
• On-demand production

3D printing PCBs have a number of limitations though:

• A relatively limited range of printing materials are available
• Directly printed circuit boards can struggle with conductivity
• PCB size can be an issue in some cases

Nano Dimension believes that competition primarily comes from companies manufacturing prototype PCBs through traditional manufacturing processes, like etching, pressing, and drilling. There are also a large number of companies offering additive manufacturing solutions, although few of these are focused on the same applications as Nano Dimension.

The fact that Nano Dimension is targeting different end markets makes it difficult to compare the company’s recent performance to peers. Most companies in the additive manufacturing space have commented on the difficult macro environment, with equipment sales being particularly impacted. Nano Dimension has stated that it has seen headwinds but that its pipeline should lead to strong growth through the remainder of the year.

Nano Dimension

Nano Dimension wants to be a leader in precision additive manufacturing. The company was focused on using additive manufacturing to produce printed circuit boards, but it is not clear that the company ever found product-market fit in this area. It has been suggested that limited conductivity and an inability to handle high temperatures have hampered customer adoption of Nano Dimension’s products.

After raising an enormous amount of capital on extremely favorable terms in 2021, Nano Dimension went on a spending spree which has shaped what the company is today. Nano Dimension now offers a range of 3D printers, materials, software, and robotics. While the breadth of Nano Dimension’s product portfolio has increased rapidly in recent years, the company’s solutions still generally target precision additive manufacturing.

Printers

The DragonFly IV is an inkjet printer that targets the production of PCBs and electronic devices. It deposits conductive and dielectric substances while integrating in situ capacitors, antennas, coils, transformers, and electromechanical components.

The Fabrica 2.0 is a Digital Light Processing (DLP) printer that can produce micron-level resolution polymer and composite parts. It is enabled by innovative Micro Adaptive Projection DLP technology.

Admaflex DLP printers utilize a patented DLP foil system that enables the fabrication of complex ceramic and metal parts.

Robotics

Nano Dimension offers a suite of Surface Mount Technology (SMT) for electronics manufacturing. SMT is used to mount electrical components directly onto the surface of PCBs. This allows for increased manufacturing automation, which lowers costs and improves quality. It also allows more components to fit on a given area of substrate. In theory, SMT could have synergies with Nano Dimension’s DragonFly IV inkjet printers.

Materials (inks, resins, slurries)

Nano Dimension has developed a range of materials for its 3D printers, including nanoparticle conductive and dielectric inks, polymer and composite resins, and ceramic and metal slurries. The company continues to direct most of its R&D efforts toward materials and has stated that it will announce a major advancement in November. This could be important given that material limitations appear to be part of the reason that additive manufacturing is not more widely used in the production of PCBs.

Software

Nano Dimension offers a range of software that aids design, simulation, and manufacturing. The company also has AI software (DeepCube) which was obtained through an acquisition. The goal here seems to be to enable Nano Dimension’s manufacturing equipment to improve with experience. DeepCube was originally purchased so that it could be deployed within Nano Dimension’s own business, which seems questionable given Nano Dimension’s lack of scale at the time. DeepCube is now also being offered as a standalone solution, with 4-5 customers already reportedly in the process of signing long-term contracts.

It is difficult to ascertain what exactly DeepCube’s software is based on public information, but it is supposed to enable faster and more accurate training of deep learning models and improved inference performance. This should allow AI to be efficiently deployed on edge devices, like 3D printers.

Acquisitions

Nano Dimension has made a number of acquisitions over the past few years, which has expanded the company’s product portfolio and helped it to scale.

• Nanofabrica provides high-resolution additive manufacturing systems (Fabrica 2.0).
• Essemtec offers a range of SMT and pick-and-place equipment, amongst other robotic solutions.
• GIS supplies control electronics, software, and ink delivery systems, with a focus on precision-oriented applications.
• Admatec and Formatec offer 3D printing systems (Admaflex) for ceramic and metal end-user parts. Admatec and Formatec also have a service bureau platform.

Nano Dimension also recently acquired Additive Flow for its 3D design, simulation, and optimization software. Simulation capabilities include mechanical, thermal, and thermo-mechanical properties. This acquisition is expected to help Nano Dimension’s customers to design electronic components. Additive Flow has customers within the following industries:

• Optics & Optoelectronics
• Aerospace & Defense
• Semiconductors
• Energy
• Electronics

Acquisition Targets

Nano Dimension still has close to 1 billion USD in cash and short-term investments on its balance sheet. While a significant chunk of this will be needed to help the company scale, Nano Dimension also plans on engaging in further M&A activity. It is focused on advanced electronics and additive manufacturing companies with scaled businesses.

On the second quarter earnings call management suggested that Nano Dimension had 3-5 acquisition opportunities ahead of it, with two of those being very large companies. Nano Dimension may find it difficult to complete an acquisition though, unless targets are forced to sell by weak balance sheets and ongoing losses.

Liquidation Attempt

Nano Dimension’s large cash balance and negative enterprise value have made it the target of activist investors in recent months. Murchison has taken a stake with the objective of liquidating Nano and realizing the value of its cash. This would create reasonable returns from current price levels, but shareholders may feel that Nano Dimension’s upside potential outweighs any near-term gain from liquidation. The market is clearly on Murchisons side though, with Nano’s market cap indicating that investors believe the company will misallocate its capital.

Nano Dimension recently decided to enact a 200 million USD purchase plan, with the plan receiving Israeli court approval in the last few weeks. The company is now allowed to buy back up to 200 million USD worth of its American Depositary Shares during the next twelve months. Given the company’s current share price, this could create shareholder value, but the move is not without opportunity cost. M&A could be possible at extremely attractive valuations in the coming months and Nano Dimension may also need the cash for its own operations at some point.

The buyback could be seen as a form of takeover defense, as the repurchase plan is likely to drive Nano Dimension’s stock higher and will leave less cash available for activist investors.

Financial Analysis

Nano Dimension preannounced its third quarter results in the middle of October. The company’s revenue was 12.2 million USD, a 22% YoY increase, which management suggested was mostly organic. Growth is clearly tapering off though, as M&A has been the primary growth driver for Nano Dimension over the past few years.

While any growth in the current environment should be viewed positively, the heavy reliance on M&A and a potential growth surge caused by a large order in the second quarter should be considered. During the second quarter, Nano Dimension received the largest order in its history from a leading aerospace company, with the order expected to ship in the second and third quarters. While Nano Dimension expects this to be a repeat customer, this also creates a risk of weaker sales in coming quarters.

Nano Dimension has respectable gross profit margins for an additive manufacturing company, with margins generally improving as the company has scaled. Gross profit margins appear to be settling into the 40-50% range now that pandemic headwinds are behind Nano Dimension.

Nano Dimension is still incurring large operating losses, which is largely a function of the company’s lack of scale. Nano Dimension is also relatively inefficient, spending an abnormally large amount on R&D and general and administrative expenses. Breakeven likely won’t be achieved until the company reaches at least 300-400 million USD in annual revenue. Given the company’s current organic growth rate, cumulative operating losses in the ballpark of 500 million USD should therefore be expected before breakeven is reached.

Valuation

Nano Dimension’s negative valuation may make the stock appear attractively valued, but this is dependent on whether the company can effectively utilize its cash balance and generate free cash flow in the future. For example, the company’s market capitalization is only around 15x its annual interest income.

Adjusting Nano Dimension’s enterprise value for the cash it is likely to burn on its way to profitability shows that the company is broadly based in line with peers. Shareholders could be handsomely rewarded if Nano Dimension can pick up attractive assets at depressed valuations. Otherwise, investors face the prospect of a slow grind downward as the company’s cash balance dwindles.