Synthetic biology used to be something you saw in the movies, such as Jurassic Park when they use preserved DNA to bring dinosaurs back to life. But what synthetic biology company Ginkgo Bioworks Holdings (DNA 3.29%) is doing isn't that far off from what used to be fictional.
The stock came public via a SPAC merger at a time when the markets were at a near-fever pitch for new and speculative companies. Since going public, the stock has cratered, falling almost 50% from its SPAC price of $10 per share. Consider these critical details before swooping in to buy the dip. Ginkgo Bioworks tells a great story, but there are risks involved.
Ginkgo Bioworks is a story stock with a compelling tale
Ginkgo Bioworks uses DNA to program organic cells to perform a specific function, much like a computer program. Its lab platform, Ginkgo Foundry, is where the company develops and tests the DNA strains it makes. Each application is called a "cell project," and it can take anywhere from one to five years to develop and bring to production.
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A great example is Ginkgo Bioworks' project with cannabis company Cronos Group. Ginkgo developed cells that it could program with DNA to produce cannabinoid molecules formerly only found in the natural cannabis plant and are difficult to access. In other words, Ginkgo can grow these rare molecules in its lab, and they are chemically the same as if they occurred naturally. Cronos is using these compounds for edible cannabis products.
The potential for technology like this is enormous and comes with a virtually limitless number of applications. Ginkgo's existing book of applications ranges from antibodies and enzyme discovery for vaccines to food additives and industrial products.
But is the story reflected in the valuation?
So why would an investor consider Ginkgo Bioworks a story stock? Well, the company hasn't brought in much actual revenue yet. While there are about 61 active cell programs as of Q3 2021 earnings, the company's done $79 million in revenue through the first three quarters of 2021.
The company went public in the fall of 2021 via a merger with a special-purpose acquisition company (SPAC) at a valuation of $15 billion, a tremendously large market cap considering the paltry revenue that the business is producing. Even after its nearly 50% drop, the stock's market cap is still more than $8 billion.
Ginkgo Bioworks presented long-term revenue and profit estimates before coming public. It called for revenue to hit $1.1 billion in 2025. At that time, it would also generate positive EBITDA (earnings before interest, taxes, depreciation, and amortization) for the first time on an adjusted basis. But the company could take years to be profitable. It would probably be fair to argue that the financial gymnastics of these projections show that the business is very far away from turning a profit.
Back-end business could be difficult to value
The company's current revenue is virtually all upfront fees from clients to develop cell programs. Gingko Bioworks operates a two-ended business model, where it charges an upfront fee to begin a program, and back-end royalties or equity awards once the program is completed. For example, the Cronos Group awarded Ginkgo Bioworks with 1.5 million stock shares to achieve a critical milestone in the cell program.
These back-end rewards don't reflect as clearly in the top and bottom lines, making Ginkgo somewhat harder to value. Investors could hope that the company's collection of royalty streams and equity stakes eventually become the primary contributor to the business. The upfront revenue generated from cell programs is more a means to accumulate these back-end rewards. This is probably what an investor should focus on to justify buying the stock today.
However, investors need to be aware of how long this might take. The Cronos cell program took three years to reach that milestone, so there could be a long wait for upfront opportunities to translate into the back-end value that drives actual profit. It's also possible that programs could fail, and something that was once an exciting cell program never makes it to the finish line.
Is the stock a buy?
Even after its dramatic decline, it's hard to look at the stock and see a bargain. The back-end value created at Ginkgo isn't enough to impact the company's profit estimates for the next several years, and that's assuming Ginkgo's projects are executed successfully.
The story of Ginkgo Bioworks is fascinating, and it's exciting to think about what it could eventually become, a platform for creating things from DNA. If the long-term vision becomes a reality, there's probably a lot of growth to be had at the company, and investors could likely get in at a later point and still make a lot of money.
In the meantime, it may be wise to let the company prove itself more before buying shares because the valuation is asking for quite a leap of faith at this point.
