This Growth Stock Is Down 63% in 1 Year. Here's Why You Should Buy the Dip and Hold It for 5 Years

With shares of Ginkgo Bioworks (DNA -5.51%) collapsing by 63% in the last 12 months, you'd be forgiven if you thought the biotech's heyday had ended.

But for daring investors who can tolerate plenty of risk and who have enough patience to wait for five years or potentially a bit less, it's possible that this biotech's time in the Sun probably hasn't even started yet. Here's why Ginkgo Bioworks could be a great contender in 2023, regardless of what its stock did recently. 

Why this stock hasn't been a good performer recently

Ginkgo's fortunes have been poor lately thanks to a combination of the bear market's distaste for unprofitable growth stocks and some genuine headwinds that are likely to permanently depress sales in one of its major segments. 

The company has two main segments: biosecurity, which offers coronavirus testing to locations like airports and schools, and the biofoundry segment, which is a bit more complicated. In a nutshell, Ginkgo's biofoundry is a contract research and manufacturing organization that (among several other functions) helps customers design, create, and cultivate bioengineered microorganisms like yeast at industrial scale. It's hard to do that sequence of tasks inexpensively, which is why an organization might be interested in working with Ginkgo. 

Whereas its customers might need to try to raise their bio-engineered cells manually, the biotech is developing a suite of machine learning-enabled software tools and extensive hardware automation via robotics in hopes of making the process as streamlined as possible. In the long term, that would make it an appealing collaborator in biopharma as customers could get many of their bioengineering and biomanufacturing needs handled at a lower cost than they could using their in-house resources.

Unfortunately, while management claims that improving efficiency is a priority for 2023, the company remains unprofitable, and it's unclear when that might change. So Ginkgo hasn't yet proven its business model, and to put it in more explicit terms, it hasn't proven that it can actually operate a viable biofoundry, which only underscores the economic difficulty of the problems it's trying to solve for its customers.

To make matters worse, its revenue from coronavirus testing is drying up. In the fourth quarter of last year, biosecurity sales only brought in $45 million compared to $114 million a year before. Plus, after burning more than $304 million in cash in 2022, the company only has about $1.3 billion remaining, so even if insolvency isn't right around the corner, the clock is ticking.

All of the above makes Ginkgo Bioworks a fairly risky stock.

The warts of today might not matter in the long run

Despite the risks, there are also a few developments that could make buying Ginkgo today a stellar investment before the end of the decade. 

The per-unit costs of its strain tests, a convenient shorthand metric that management uses as a proxy to measure the scale of its biofoundry operations, fell by 30% in 2022 compared to a year prior. In the same period, its quarterly gross margin widened significantly, reaching 69.2%. And in Q4 2022, it launched 20 new programs for clients to arrive at a total of 59 launches for the year, which is a fairly large number considering that it only onboarded 31 in all of 2021.

This year, it plans to initiate around 100 additional programs, which management thinks will generate $175 million in revenue in 2023 when paired with the income from its existing programs. But the real value will be in the learning it derives from serving such a large influx of fresh demand for the biofoundry. If there are economies of scale present in biofoundry operations -- and the company, with good reason, has long maintained that there likely are -- initiating so many additional programs should start to drive per-program costs down while also bringing in plenty of additional revenue. 

If in 2023 or 2024 Ginkgo can continue to show a clear trend line of its costs falling and its margins widening with greater biofoundry scale, the stock is unlikely to wait for the net profit margin to actually become positive before its shares shoot upward. So for investors who can stomach the significant risks of a potentially long and uncertain road to reaching that point, buying now could be hugely beneficial, even if the next year or so sees its share price continue to suffer as a result of the bear market.