I like to write about companies that lack coverage on SA and today I’m taking a look at a Chicago-based manufacturing startup named Fast Radius (NASDAQ:FSRD). In February 2022, the company was listed on NASDAQ following a merger with a Special Purpose Acquisition Company (SPAC) named ECP Environmental Growth Opportunities Corp and things haven’t been going well for investors. The share price has slid to $0.90 as of the time of writing and I think there could be significant stock dilution coming in the future due to the high redemption rate after the SPAC deal. Let’s review.
Overview of the business and financials
Fast Radius was established in 2017 and is a cloud manufacturing and digital supply chain company. it has a proprietary operating system and a network of distributed, industrial-grade 3D printing facilities and it aims to increase consumer demand for fast turnaround and customized products. The technologies it relies on include injection molding, CNC machining, urethane casting, and AM.
Fast Radius says that this is the first-of-its-kind infrastructure to design, make, and move industrial-grade parts in the digital age. In 2018, it was named as one of the nine best factories in the world by the World Economic Forum.
The total addressable market for technologies that the company offers was valued at $778 billion in 2020. However, Fast Radius specializes in volumes of below 100,000 units, which shrinks its total addressable market to about $368 billion. This figure is expected to grow to $610 billion by 2030.
Turning our attention to the financial performance, the revenues of Fast Radius grew by 43.29% in 2021 to just over $20 million. Unfortunately, the loss from operations almost tripled as the growth push resulted in a rapid increase in sales and marketing, and general and administrative expenses. What I find concerning is that the gross profit margin was negative in 2021. The decrease can be attributed to a new CNC manufacturing, which was running at low utilization at the end of the year.
For 2022, Fast Radius expects to generate revenues of between $27 million and $32 million while adjusted EBITDA loss is expected to come in at between $72 million and $65 million. This is higher than the adjusted EBITDA loss of $53.3 million in 2021 which I think is normal considering the company is currently ramping up. According to the corporate presentation when the SPAC deal was announced, revenues are expected to soar to over $600 million by 2025 and to about $2.1 billion by 2030.
So, where are the funds needed to fuel the growth expected to come from? After all, free cash flow isn’t expected to enter positive territory until 2025.
Well, this was the point of the SPAC deal – get about $410 million in cash on the balance sheet at a market valuation of $1.42 billion. Overall, I don’t think the company looked expensive considering this translated into an EV/EBITDA multiple of 7.4x based on 2025 results.
Most of the funds were set to come from the cash in the trust – a total of $345 million. However, the redemptions wiped out about $315.4 million from that amount which means that the company will have to rely mainly on $100 million of private investment in public equity (PIPE) to finance its growth. In my view, this puts the company in a difficult position from a funding point of view and I think this is why the share price has crashed by over 90% in January 2022.
Yet, you might point out that I’ve recently covered several companies that listed through a SPAC deal with a much higher redemption rate and their share prices have been doing pretty well so far – e.g., Forge Global (FRGE) and Allego (ALLG). Well, the reason I think that the share price of Fast Radius is doing poorly is because the redemptions were not high enough. You see, the share float just isn’t low enough here to fuel expectations for a short squeeze which means that speculators are likely avoiding Fast Radius. And investors who believe in the company’s compelling financial expectation for the future are likely avoiding the stock because of fears that there could be significant stock dilution in the near future. In my view, this looks like a perfect storm and there is no end in sight. That being said, I think that short selling is dangerous at the moment as data from Fintel shows that the short borrow fee rate stands at 104.78% as of the time of writing. Also, there are still no options available.
Overall, I plan to put Fast Radius on my shortlist as this seems to be an innovative Industry 4.0 company that could become an important market player in a few years. I plan to decide whether to open a position once the company resolves its funding issues, which I expect to happen through a capital increase that is likely to result in significant stock dilution.
Fast Radius has ambitious growth plans and I think it has been executing them well so far as revenues grew more than 40% in 2021. Unfortunately, the listing was somewhat lackluster due to the high redemption rate. I don’t think this is a sign that anything is wrong with the company as many SPAC listings over the past few months have done even worse as the market has been shunning tech companies due to rising interest rates.
Ironically, I think that the share price of Fast Radius has been performing so poorly because the redemption rate wasn’t low enough to fuel interest in a short squeeze.
Overall, I think that Fast Radius is an interesting company that is likely to have strong free cash flow by 2025. Then again, we could see significant stock dilution before that, and I plan to sit on the sidelines for the time being.
Author’s Note: Thank you for reading my analysis. Please note that I will be launching a marketplace service named Bears and Resources soon. I plan to share my live portfolio and my shortlist, and discuss exclusive investment ideas. Early subscribers will receive a legacy discount. Stay tuned for more details.