There's no rule that says you should be copying the trades of famous investors and portfolio managers, but sometimes they have insights about what companies could make it big that are at least worthy of your attention. For instance, Ark Invest's Cathie Wood is loading up on shares of Ginkgo Bioworks (DNA -17.29%), making two purchases on May 11.
Wood is a longtime fan of the stock, and her ARK Innovation ETF (NYSEMKT: ARKK) owns 10.3% of the company, which represents 1.6% of the fund's holdings. And while one can only speculate about exactly what made her pull the trigger to buy more shares now, there are (at least) three reasons that probably motivated her choice.
1. The biofoundry is scaling up, big-time
Ginkgo's business model is to help its clients with the tricky tasks of designing, culturing, and harvesting the valuable outputs of bioengineered microorganisms like yeast at industrial scale. Management's term for that model is "biofoundry," which is a direct reference to a similar workflow in the semiconductor industry wherein chip foundries are responsible for manufacturing the designs that customers (the chip designers) pay to have made.
Much like with semiconductor foundries, the biofoundry makes money by doing the engineering and manufacturing tasks far more efficiently than what customers could do on their own. Attaining a higher level of efficiency means taking advantage of economies of scale to drive down production costs. And scaling up to a size where that's feasible is exactly what Ginkgo is doing.
In the first quarter of 2023 alone, it onboarded 13 new programs from clients, and its cell engineering operations generated $34 million in revenue. That's 59% more revenue than a year prior, but before the end of the year, management is angling to onboard a total of 100 programs -- and it has 97 running right now. Each new program should in theory drive down costs because it will increase the scale of the biofoundry's capacity.
Furthermore, it just opened up a new expansion to its biofoundry facilities in January. So Cathie Wood is likely banking on Ginkgo's cost per program continuing to fall, which will eventually make this company profitable.
2. Powerful collaborators are signing up
For Ginkgo's business model to work, forging collaborations with large players is quite helpful, as it creates social proof that its services are reliable and valuable, not to mention the direct benefits of getting paid and potentially getting investments. And right now, the company's roster of collaborators is looking star-studded. It's working with Merck, Moderna, Eli Lilly, and many others in biopharma and agriculture.
If the collaborations turn out just as planned, it'll likely lead to further agreements with the same parties. More importantly, the biotech might be able to capture some of the revenue that its collaborators generate by teaming up as a result of royalty-sharing agreements. That doesn't mean Ginkgo will make more money than it spends on every deal, and for the coming quarters, it's actually more reasonable to expect the opposite.
But in the long run, Wood is probably anticipating that courting and then pleasing high-powered benefactors will drive more customers to Ginkgo's platform while also giving it access to more resources than it'd have on its own. Obviously, that's bullish.
3. Its shares are dirt cheap at the moment
Thanks to the bear market, Ginkgo's shares are down by 53% in the last 12 months. Now, its price-to-sales (P/S) ratio is 4.3, making it discounted in comparison to the biotech industry's average of 5.3. And Wood isn't one to pass up a bargain buy, provided her long-term investing thesis still holds up.
Importantly, Ginkgo's shares will not be cheap forever if it can demonstrate that its biofoundry operations are trending toward breaking even. While its quarterly gross profit margin rose over the last 12 months to reach 72%, it still burned more than $110 million in cash in the first quarter of 2023. Management hasn't emphasized that profitability is on the horizon, either.
Therefore, as positive as recent developments have been, Ginkgo still has a long way to go before it's anything other than a highly risky bet. So if you're thinking of grabbing a few shares, be aware that Cathie Wood can probably afford to sit on any losses for a lot longer than you would want to accept.
