Ginkgo Bioworks (DNA -2.84%) helps companies produce bio-engineered products that can be game changers in their respective industries. One example includes working with marijuana producer Cronos Group to help it grow cannabinoids in a lab rather than in a greenhouse or field. Ginkgo's business has many applications across industries and the company believes its total addressable market could be worth between $2 trillion and $4 trillion within a few decades.
The problem is, in the meantime, the business has been struggling and the stock is down 92% since peaking in Nov. 2021.
Revenue has been dropping and will nosedive even more this year
One thing you can't miss when looking at Ginkgo's website is the continuous stream of press releases announcing new partnerships and collaboration agreements with many businesses. One of its most recent announcements was that it would work with biotech company Visolis to help produce sustainable aviation fuel. But despite entering into many deals, the biotech company remains deeply unprofitable and even growth hasn't always been a sure thing.
DNA Revenue (Quarterly YoY Growth) data by YCharts.
In the past year, Ginkgo's growth rate has been falling. And for the last three months of 2022, its revenue fell by 34% year over year as a result of what management said was an "expected reduction in K-12 COVID-19 testing services." But arguably, for a fast-growing business, investors may have still expected better results and for the company to be in the positive, given all of its partnerships and new deals.
For 2023, the company forecasts revenue of just $275 million, which represents a sharp decline from the $478 million in sales it posted last year. Service revenue makes up the bulk of the company's top line and is part of its biosecurity segment, which Ginkgo notes is "dependent on the demand for COVID-19 testing products and services." And with the public health emergency for COVID-19 ending this month, there's little reason to be optimistic that demand will remain strong.
The company's operations may not be as diverse as all of its partnerships may suggest
Another concerning problem for investors is that despite all of its partnerships and collaborations, the company noted on its 2022 earnings report that there were two (unnamed) customers that each represented more than 10% of the company's total sales. Together, revenue from those two customers accounted for 22% of sales. Although that's down from 28% a year ago, it's still a fairly significant chunk for a business that appears as though it should be more diverse than it is.
That adds some risk for investors because it suggests that the deals Ginkgo is securing either aren't all that big or they may take a long time to materialize. And in the meantime, the company is incurring losses and burning through cash.
DNA Net Income (Quarterly) data by YCharts.
Investors shouldn't expect a turnaround soon
Ginkgo is a risky stock to own. And at nearly 5 times its trailing revenue, it's still not a cheap buy. As its revenue falls further, that multiple will look even worse and could lead to an even lower valuation for the stock.
There's potential for the company in the long run and all of its deals may inevitably pay off -- but the question is how long that may take, and that's the big unknown today. The positive is that Ginkgo is sitting on cash and cash equivalents of more than $1.3 billion, so it isn't running out of money anytime soon. But if things don't improve, that cash balance could shrink quickly, especially if Ginkgo becomes more aggressive in pursuing growth opportunities and burns through money at a faster pace.
Overall, Ginkgo isn't a suitable investment to consider unless you're willing to take on significant risk. There are much better growth stocks for investors to consider that will be safer options to put into a portfolio. Ginkgo is a stock worth watching but not investing in just yet.
