Shares of Twist Bioscience (NASDAQ:TWST) nearly doubled last month, logging gains of 89%, according to data provided by S&P Global Market Intelligence. There wasn't any company-specific news, but investors were excited to own the leading manufacturer of custom-designed DNA sequences following its initial public offering (IPO).
Synthetic DNA is required for high-throughput genetic engineering applications, such as when designing industrial microbes or engineered crops, and could even provide value in materials applications, like digital data storage or drug delivery. Industrial biotech companies and academic researchers can synthesize their own custom DNA, but can save time in certain research and development (R&D) workflows by ordering sequences from companies such as Twist Bioscience.
Is it really worth a nearly $800 million market cap, though?
The business raised nearly $70 million for its market debut to go along with about $92 million in cash and cash equivalents held at the end of June 2018. That gives Twist Bioscience a relatively healthy cash balance to hit the ground running with expansion efforts, but it was on pace to lose nearly $70 million from operations in fiscal 2018 (which ended in September, although the company hasn't released full-year results yet).
Investors are hoping triple-digit year-over-year revenue growth can deliver gross profits in fiscal 2019 or shortly thereafter, but that may not be enough to offset soaring operating expenses. It's also worth noting that substantially all of the company's revenue comes from just two customers: Ginkgo Bioworks and Microsoft. That top-heavy structure is a big risk to the Twist Bioscience, especially considering that Ginkgo Bioworks isn't a sustainable business at the moment and Microsoft is only buying synthetic DNA for an R&D project.
Twist Bioscience is also being sued by Agilent Technologies, which alleges the DNA synthesis technology upon which the company is built was misappropriated when founder and CEO Emily Leproust was Agilent's director of applications and chemistry R&D. It's a serious allegation that's working its way through the courts now.
It's not too surprising that investors are getting excited about the ability to own Twist Bioscience, which is hands down the leading DNA synthesis company. That said, a market cap of nearly $800 million is one heck of a premium. If the business turns in $25 million in revenue for fiscal 2018, then it would be trading at 32 times sales. That's several times more expensive than a reasonable premium.
Throw in the fact that it's likely to burn at least half of its cash balance in the next 12 months to expand at home and in China (which may end up being a horrible idea given concerns over intellectual property theft), isn't close to turning a profit, generates most of its revenue from only two customers, and is being sued by Agilent, it's evident that investors should steer clear of this overpriced stock for the time being.