Because of her aggressive and continued investment in some of the market's hottest and most controversial growth stocks, Cathie Wood is one of the most discussed investors of the last few years. With her company, ARK Invest, Wood's distinctive approach to investing leads her to buy shares of businesses that other heavyweights likely wouldn't touch -- especially the guru of value investing, Warren Buffett.
For example, Ginkgo Bioworks, (DNA 2.31%) a biotech that focuses on providing manufacturing services to other biotechs, accounts for around 2.6% of Wood's flagship fund, the ARK Innovation ETF, (ARKK 0.52%). That suggests she feels positive about its future performance.
And while it's quite unlikely that Warren Buffett would opt to buy Ginkgo stock today as part of his holdings with Berkshire Hathaway (BRK.B 0.09%), there are a few reasons why he might eventually be interested in it. Let's discuss how and why these two investors of such different temperaments could eventually come to agree on this up-and-coming biotech stock.
Why Ginkgo Bioworks isn't a Buffett stock today
Warren Buffett tends to invest in businesses that have highly consistent earnings, low-cost operations, and, above all, sustainable competitive advantages that lead to durable profit margins for the long term. At present, Ginkgo Bioworks doesn't meet any of these criteria. It doesn't have a long history of steady growth of any kind, and its normalized trailing-12-month losses are in excess of $3.1 billion. It spends way more money than it makes, and it'll continue to do so for at least a few more years. But it is building a capability that could become a major competitive advantage in the future.
A common problem in biopharma involves a company that wants to make a certain chemical or protein using a microorganism like bacteria or yeast to create it, but you lack the manufacturing facilities to do so efficiently at scale. For research-scale use, the solution is to either "do it by hand," toiling in the laboratory with minimal automation, or, if you need larger quantities of the product, you can hire a contract manufacturing organization (CMO) to make it for you. This is much more expensive and also involves significant lead times before you get enough of what you want.
For industrial-scale production, significant investment in manufacturing capabilities is usually necessary -- and that's where Ginkgo Bioworks enters the picture, offering a way to reduce costs.
Ginkgo plans to operate as a biofoundry, which means that it will take genetic blueprints of genetically engineered microorganisms from its clients, grow them with high efficiency in bioreactors at mass scale, and then pass on the desired outputs once they're isolated and purified with high-automation methods.
In other words, it's trying to become a biotech services company with a low-cost manufacturing platform that others will pay top dollar to use because it helps them save a tremendous amount of money and hassle. Because its manufacturing processes are so highly automated, the business should be able to scale very quickly when adding new customers, which is something that traditional CMOs struggle with.
The company is still ramping up these efforts, which is another reason Buffett might be hesitant to invest. Buffett is more interested in companies that have been proven successful for years.
Why it might be a Buffett stock in the (distant) future
Nonetheless, Warren Buffett loves low-cost operations, especially when they're backed by a competitive advantage like extensive automation or the presence of economies of scale. Once Ginkgo has its manufacturing platform developed to the point that it can take on any given project from a customer and expect to turn a profit thanks to its (hopefully) high operating efficiency at large scales, it may not need to change very much to make money and grow for years and years.
Ginkgo Bioworks will likely face minimal competition, as biofoundries are very capital-intensive to start up, so there are high entry costs and few options for customers to consider. To be clear, it's this potential that's likely so appealing to Cathie Wood, and businesses offering evergreen services for which there's constant demand is also a hallmark of Buffett's investing style.
And there are a few indications that Ginkgo is already working toward realizing its promise. Its quarterly revenue from foundry operations is rising 100% year over year as of the second quarter, reaching $44.2 million. Plus, its automated cell programming and manufacturing services are now cheaper per unit than manual methods, and the company isn't even done developing its platform to maximum efficiency or scale.
If Gingko can deliver on these promises of future cost savings for customers and actually demonstrate that it has a competitive advantage thanks to extensive automation, it could easily become the kind of company that Buffett would invest in. That could take a few more years, though, so for now the stock will remain a Cathie Wood pick -- but not a Buffett one.