Synthetic biology company Ginkgo Bioworks Holdings (DNA 2.26%) is down roughly 80% from its highs posted late last year. But rapidly growing revenues and a hefty cash balance, combined with aggressive growth plans and disruptive technologies, could nurse this stock back to health.
Biology by design
Carving a unique niche in the biotech sector, Ginkgo Bioworks aspires to engineer and program cells "as easily as we can program computers." The company's designer microorganisms are used in a broad spectrum of applications including food, agriculture, pharmaceuticals, and industrial chemicals.
The self-described "organism company" operates foundries, or robotic biotech labs, for researching and developing its products. Clients utilize Ginkgo Bioworks' genetic engineering capabilities for producing therapeutics, medicines, fragrances, flavorings, ingredients, and more.
Ginkgo aims to grow and diversify by way of strategic partnerships. In 2018, Ginkgo announced a partnership with Cronos Group to produce cultured cannabinoids. The partnership has yielded two innovative cannabis products, with more products planned for the future.
In 2020, Ginkgo joined forces with Moderna to optimize production of its COVID-19 vaccines. And last month, in the company's largest cell engineering deal to date, Ginkgo Bioworks signed an agreement with Bayer to assist development of its agricultural medicines.
Also last month, Ginkgo Bioworks announced the acquisition of fellow biotech company Zymergen (ZY), whose platform will complement Ginkgo's existing capabilities. The deal is expected to be complete by early 2023.
Obstacles to overcome
Despite the company's unique vision and string of partnerships, the hype has worn off for investors, and their confidence has fallen drastically. In order to get investors' attention again, Ginkgo Bioworks will need to surmount some significant challenges.
First off, Ginkgo may have been overvalued when its stock debuted in 2021. It was introduced via a SPAC merger with a market valuation of over $15 billion based on the initial price. That's nearly four times Ginkgo's last valuation as a private company, and helps explain why the stock has fallen so dramatically from its entry into the public market.
With its current market cap around $4.5 billion, investors will now have to decide whether the market has discovered a fair value based on the company's performance and outlook. Ginkgo Bioworks' price-to-sales ratio currently stands at 10.51. Compared to biotech competitors Beam Therapeutics and Denali Therapeutics, with similar market caps and higher P/S ratios, Ginkgo seems to be in comparatively good shape.
|Beam Therapeutics (BEAM -8.17%)||72.31|
|Denali Therapeutics (DNLI -1.97%)||50.07|
Another factor to consider is that Zymergen posted a $68 million operating loss in the first quarter. Ginkgo's already bleeding money on its own, as a massive surge in both its stock-based compensation and its research and development spending outpaces its revenue growth. The company posted a net loss of nearly $2.4 billion over the trailing 12 months, and burned through a smaller but still significant $263.8 million in free cash in the same period. To avoid an even steeper impact to operating costs, Ginkgo will have to substantially restructure and streamline Zymergen's organization while shoring up its own.
There is also the possibility that in trying to be "all things cellular engineering," Ginkgo could spread itself too thin. While its products are wide-reaching, serving all possible facets of synthetic biology could prove too ambitious for the company.
Rapid revenue growth
But Ginkgo's performance has been solid so far, with three of its last four quarterly earnings showing revenue increases.
In the latest available earnings, the company reported year-over-year revenue growth of 282% for Q1 of this year. In its highest recorded quarterly revenue to date, the company brought in sales of $168 million, up from $44 million in Q1 2021.
This revenue growth was largely fueled by the 11 new cell programs added to its foundry platform in the first quarter, a 175% increase year over year. The company's management also raised its expected total revenue range for the year by 15%, to $375 million-$390 million.
And Ginkgo's $1.5 billion cash balance will not only keep the lights on, but also help fund further company developments. This includes investing back into the company's core technology platform as well as other possible acquisitions.
Looking forward, biotech investors should pay close attention to future earnings reports to see whether Ginkgo's revenues are in line with expectations, and whether its notable increase in R&D spending accelerates sales growth. If management allocates the company's resources appropriately and keeps operating costs down, Ginkgo Bioworks could not only recover, but emerge as a major presence in the biotech space.