Increasing losses, additional stock dilution, and a lack of financial details in newly announced collaborations have proven no deterrent to the upward trajectory of Twist Bioscience (NASDAQ:TWST) stock. Shares of the DNA synthesis company have soared 186% since the beginning of 2020. Due to an increase in the number of shares outstanding in that span, the company's market valuation has soared 283% year to date. 

What's going on? In part, the technology platform's assistance of global research related to the coronavirus pandemic has had a positive effect on shares. In part, the company's valuation has been aided by macro factors, namely the Federal Reserve's direct injection of liquidity into corporate bond markets, which has de-risked the stock market. Does the existence of a safety net under Wall Street make the synthetic biology stock a buy despite the company's risky growth-at-all-costs business model?

A teaching model of DNA.

Image source: Getty Images.

An intriguing technology platform

Twist Bioscience is developing a DNA synthesis platform in which the letters of the genetic alphabet are pooled together in tiny silicon wells and stitched together to form accurate sequences. The resulting products can be used in a wide array of applications. 

Synthetic genes can be used in high-throughput genetic engineering experiments by customers in industrial chemicals or agriculture. Short genetic sequences called oligomers can be used for target enrichment in next-generation sequencing (NGS) tools required by customers in genetic testing. Twist Bioscience also offers custom oligo pools (comprising hundreds of thousands of oligomers), which are used by biopharmaceutical customers to build screening libraries for drug discovery.

Put more simply, the company's technology platform can be utilized in all areas of biotechnology, including biopharma, industrial biotech, agricultural biotech, and more. That's an intriguing pitch for investors to consider, which is bolstered by the company's investment in tools aimed at the coronavirus pandemic.

Twist Bioscience sells synthetic SARS-CoV-2 controls required for diagnostic tests that determine if an individual is infected with the novel coronavirus. The company has also partnered with Vanderbilt University to develop a therapeutic antibody to prevent and treat COVID-19 and joined an international alliance to help others discover additional antibodies. 

That's all well and good, but here's a blunt question for investors to ponder: what tangible effects will any of this have on the business? Promoting the capabilities of a technology platform and announcing research aimed at the coronavirus pandemic are separate from actual business performance. 

A businessman reaching over an edge attempting to grab bags of money floating on balloons.

Image source: Getty Images.

Is growth-at-all-costs worth the cost?

For all of the talk of the genomics and proteomics research enabled by the DNA synthesis platform, economics has been the biggest obstacle to Twist Bioscience. The business has poured money into marketing and research, but doesn't appear to be on the path to sustainable profits. In fact, operating expenses have grown faster than revenue and gross profits. 

Consider that gross profit increased by $7.7 million in the first half of fiscal 2020 compared to the year-ago period, but that operating expenses increased $16.2 million in that span -- and that excludes the $22.5 million legal settlement with Agilent Technologies

Metric

Fiscal First Half 2020

Fiscal First Half 2019

Change (YoY)

Revenue

$36.5 million

$25.0 million

46%

Gross profit

$9.1 million

$1.4 million

549%

Operating income

($87.9 million)

($49.2 million)

N/A

Operating income excluding legal settlement

($65.4 million)

($49.2 million)

N/A

Net income

($87.4 million)

($48.6 million)

N/A

Operating cash flow

($93.6 million)

($42.5 million)

N/A

Data source: SEC filing. YoY = Year over Year.

Twist Bioscience has relied on sales of common stock to fund operations, including two offerings from mid-February to early June. The number of shares outstanding has grown from 26.6 million at the time of the initial public offering (IPO) in late 2018 to 44.5 million today. 

To be fair, Wall Street hasn't seemed to care about the stock dilution (investment banks have made handsome profits selling the shares gobbled up in public offerings), and the share price shows stock offerings certainly haven't stung individual investors. But the financial reality underlying the business presents a high degree of risk that simply isn't being factored into the share price.

Twist Bioscience is valued at $2.7 billion. Let's be generous and assume the business generates $100 million in revenue in fiscal 2020. That values the stock at 27 times future sales. The average valuation since the company's IPO is roughly 12 times future sales.

That's a pretty hefty valuation for an unprofitable company competing with industry titans such as Thermo Fisher Scientific, Agilent, and Illumina. What is Mr. Market thinking? 

To be blunt, this is one unusual year for the stock market. Investors must acknowledge the macro forces driving up equity prices, including the valuation of Twist Bioscience, this summer. 

The economic consequences of the coronavirus pandemic are significant and will take years to address, but the stock market has been largely immune to those effects. While it's true that "the stock market is not the economy", as analysts are keen on saying, it's also true that federal stimulus being pumped directly into the bond markets is playing a large role in sustaining equity prices.

But the safety net being cast beneath Wall Street and corporate America is unsustainable in the long run, especially considering many companies expect lower earnings in a post-pandemic world. Simply put, a historically expensive stock market is getting more expensive due to the actions of the Federal Reserve, but the market will have to account for reality eventually. Once the reckoning arrives, we'll all look back and say "it was obvious in hindsight" -- just as we did for the Dot Com Bubble and subprime housing crisis. That's likely true for the current valuation of Twist Bioscience, too.

This rise appears unsustainable given business performance

It's easy to point out that shares of Twist Bioscience, or any company, are sitting at unsustainable prices. But it's impossible to call the peak because irrational stock prices are driven by behavior and sentiment, not tangible metrics that can be crunched and calculated. After all, look at the $300 billion valuation of Tesla. Did Elon Musk discover fusion?

Barring an acquisition or unbelievable growth spurred by the coronavirus pandemic, investors can expect Twist Bioscience to fall back to a more reasonable valuation. What dollar figure will that be? When will it occur? Those are questions investors can't know the answers to.