With its shares popping by more than 21% in a day in the aftermath of its latest earnings report, Ginkgo Bioworks (DNA -4.59%) is a hot biotech company that's ripe for investment. After reporting 2021's record revenue of $314 million, a 309% rise over the prior year, it's no wonder why the stock is soaring.
Ginkgo isn't a typical biotech, though. It doesn't develop medicines directly, nor does it engage in the regulatory process in the same way as a drugmaker would. Its business model is difficult to understand, but it's also why the company might be able to aggressively scale upward and deliver uncharacteristically high returns for investors.
Let's examine three factors that smart investors are likely to appreciate about this stock so that you'll be able to judge whether it's a good pick for you.
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1. The platform is enormously versatile
When it comes to getting a large volume of something complicated like proteins, nucleic acids, and small bioactive molecules, there are (broadly) a few options to choose from.
The traditional way of doing things is to identify and capture an organism that produces the thing that's desired, cultivate it at scale, and then isolate the product. Aside from potentially being extremely inefficient, the overhead costs tend to be high, especially when the primary producer is an animal.
Another option is to identify and then perform a sequence of chemical reactions to synthesize the items of interest from their precursor compounds, thereby removing the need to care for living organisms. Merely discovering the right steps to make the desired product doesn't imply any guarantee of that process being scalable or economically efficient, though. And the discovery process can sometimes take years.
A third option is to figure out how to program microbes like bacteria or fungi to do the synthesis process. And that's what Ginkgo Bioworks' biofoundry offers as a service: programming microorganisms to produce specific, high-value molecules for customers.
This approach works because microbes are much cheaper to take care of than animals, and they're also much easier to grow at scale. Furthermore, producing biological molecules is something that's relevant to a huge number of different industries.
Right now, Ginkgo's customer base includes companies in the cannabis, biopharma, food, and other industries. And smart investors know that a versatile platform and diversified customer base makes the top line a lot more resilient than it would be otherwise.
2. Automation is a major competitive advantage
Astute readers may have noticed that I didn't mention the average difficulty of Ginkgo's approach compared to the other manufacturing options I discussed.
Speaking from experience, most biotechs are technologically capable of developing their own microbes to make compounds of interest at a small scale. The catch is that the difficulty of doing so varies widely, depending on exactly what you're trying to get the organism to make. Many countless hours have been spent in the lab (including by yours truly), trying to coax bacteria into producing things that they just can't seem to get completely to spec. And if the intended end use of their output is in a highly sensitive application, like a medicine, anything less than a perfect copy of what you're looking for is simply not usable.
Ginkgo's platform addresses this major issue by introducing a massive amount of automation into the microbial factory development process. Between its cell engineering software and its hardware tools like integrated laboratory robotics, the company has a streamlined, self-executing process for ironing out the kinks.
That means unit costs to program cells are several times lower than what the average biotech might spend on the same task. And as any smart investor knows, low-cost capabilities make for a competitive advantage.
Investing so much in automation also enables Ginkgo to credibly pursue more foundry programs than one might expect. In 2021, it initiated 31 new programs, exceeding 2020's total by 72%. This year, it's angling to nearly double that sum with 60 new programs scheduled for launch.
3. It's also a pandemic play
Thanks to its investments in laboratory automation, Ginkgo is equipped to offer coronavirus diagnostic testing to schools.
Schools across the U.S. rely on it for weekly screening. This brought in $201 million in revenue last year, which doubtlessly contributed to the market's strongly positive response to its earnings report.
If public interest in combating the pandemic wanes, it'll be majorly bad news for Ginkgo's base of revenue. On the other hand, it's likely that there will continue to be at least some ongoing demand for surveillance testing in congregate settings like schools.
So smart investors appreciate that the biotech's flashy foundry activities only account for around half of its base of revenue, with the other half being somewhat vulnerable and derived from services that are decidedly less relevant to its long-term potential.
