Portfolio manager Cathie Wood's ARK Innovation ETF (ARKK 1.05%) is known for making bets on growth-stage businesses that have the potential to disrupt their industries with new technologies.
The Ark Invest CEO is also known for having a bit of a contrarian streak, buying shares of stocks right as the market is dumping them, which is exactly what she's doing with Ginkgo Bioworks (DNA 10.60%). Even though the biotech's shares are trading down about 92% from highs set in fall 2021, Wood added to ARK's position on both April 24 and April 25.
Should you follow Ark's lead? Let's see what this innovative biotech is doing, and when it expects its efforts to start paying off for investors.
Ginkgo's platform remains a (promising) work in progress
Ginkgo Bioworks isn't like most biotechs. Rather than developing medicines or technologies to license out, its main segment is its biofoundry.
You can think of a biofoundry business as a service that helps clients to design, grow, and harvest genetically engineered microorganisms like yeast or bacteria at industrial scale. Customers don't need to do the bioengineering work involved in creating biological factories for the purpose of their choosing. They just hire Ginkgo, and then the company figures out the implementation details of the program and hands them the finished product, whatever that might be.
And because the company can (according to management) realize economies of scale via its heavily automated genetic engineering, screening, and cell manufacturing functions, it should, in theory, be able to serve customer demand far more cheaply than customers could with their own laboratories.
So far, plenty of well-known biopharma businesses have seen the appeal of Ginkgo's platform. For example, it's working with companies like Moderna to help manufacture biological components for vaccines, and Biogen to produce important precursors to gene therapies in development. It also has a few programs in agriculture and, more specifically, cannabis.
In total, its current set of collaborations and customers give it the chance to realize $2 billion in milestone payments. But it can make royalties from its ongoing efforts too, depending on the terms of the deals it signs. So if it can continue to scale up its foundry and its client base, as management hopes, it'll eventually become a very complicated money-printing machine, and perhaps even a capstone company within biopharma.
There's good reason to be cautious at the moment
Ginkgo's dream is an ambitious one, which is no doubt why Cathie Wood is a fan. The catch is that the company is nowhere near being profitable.
While it brought in $478 million in 2022, total expenses were above $2.6 billion. And though the biotech has focused on driving operational efficiencies for multiple quarters on end, increasing its quarterly gross margin in the process, total expenses are still 338% more than quarterly revenue. In other words, it has a long way to go before its business model is proven to be viable.
In 2022, Ginkgo spent $304 million of its cash reserves, and now it has just a little over $1.3 billion remaining. With that much money, it will probably have no problem continuing to scale up its foundry operations over the next three years or so. And since it only has roughly $414 million in debt, it can stand to borrow a bit more to lengthen its runway. But the fact that it has a finite runway should probably be enough to scare conservative investors away from this stock, as there's no guarantee it will ever become self-sustaining.
Nonetheless, for risk-tolerant investors, Ginkgo is a decent bet to make. The trouble is that the market is punishing unprofitable growth stocks at the moment, and it's unclear when that will end. So if you decide to load up on shares today, as Cathie Wood is doing, just be aware that the price might fall a bit further before stabilizing. It'll probably take a few years for this company to prove that its vision is a realistic one, so waiting a bit longer before investing is also a reasonable decision.
