Things Look Grim For Fathom Digital Manufacturing Corporation (NYSE:FATH) After Today's Downgrade

The analysts covering Fathom Digital Manufacturing Corporation (NYSE:FATH) delivered a dose of negativity to shareholders today, by making a substantial revision to their statutory forecasts for this year. Both revenue and earnings per share (EPS) estimates were cut sharply as the analysts factored in the latest outlook for the business, concluding that they were too optimistic previously. At US$0.77, shares are up 9.0% in the past 7 days. Investors could be forgiven for changing their mind on the business following the downgrade; but it's not clear if the revised forecasts will lead to selling activity.

Following the latest downgrade, the five analysts covering Fathom Digital Manufacturing provided consensus estimates of US$145m revenue in 2023, which would reflect an uncomfortable 9.7% decline on its sales over the past 12 months. The loss per share is anticipated to greatly reduce in the near future, narrowing 99% to US$0.17. However, before this estimates update, the consensus had been expecting revenues of US$170m and US$0.052 per share in losses. So there's been quite a change-up of views after the recent consensus updates, with the analysts making a serious cut to their revenue forecasts while also expecting losses per share to increase.

See our latest analysis for Fathom Digital Manufacturing

The consensus price target fell 75% to US$0.93, implicitly signalling that lower earnings per share are a leading indicator for Fathom Digital Manufacturing's valuation. Fixating on a single price target can be unwise though, since the consensus target is effectively the average of analyst price targets. As a result, some investors like to look at the range of estimates to see if there are any diverging opinions on the company's valuation. The most optimistic Fathom Digital Manufacturing analyst has a price target of US$3.50 per share, while the most pessimistic values it at US$0.70. With such a wide range in price targets, the analysts are almost certainly betting on widely diverse outcomes for the underlying business. As a result it might not be possible to derive much meaning from the consensus price target, which is after all just an average of this wide range of estimates.

Looking at the bigger picture now, one of the ways we can make sense of these forecasts is to see how they measure up against both past performance and industry growth estimates. We would highlight that sales are expected to reverse, with a forecast 9.7% annualised revenue decline to the end of 2023. That is a notable change from historical growth of 46% over the last three years. Compare this with our data, which suggests that other companies in the same industry are, in aggregate, expected to see their revenue grow 5.0% per year. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - Fathom Digital Manufacturing is expected to lag the wider industry.

The Bottom Line

The most important thing to note from this downgrade is that the consensus increased its forecast losses this year, suggesting all may not be well at Fathom Digital Manufacturing. Unfortunately analysts also downgraded their revenue estimates, and industry data suggests that Fathom Digital Manufacturing's revenues are expected to grow slower than the wider market. After such a stark change in sentiment from analysts, we'd understand if readers now felt a bit wary of Fathom Digital Manufacturing.

So things certainly aren't looking great, and you should also know that we've spotted some potential warning signs with Fathom Digital Manufacturing, including recent substantial insider selling. Learn more, and discover the 3 other flags we've identified, for free on our platform here.

Of course, seeing company management invest large sums of money in a stock can be just as useful as knowing whether analysts are downgrading their estimates. So you may also wish to search this free list of stocks that insiders are buying.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here