For biotechs, having the right allies can be the difference between struggling along and soaring. On that note, on August 29 Ginkgo Bioworks (DNA 3.08%) announced that it is joining forces with Alphabet, Google's parent company, in a five-year strategic partnership to develop and use new large language models (LLMs) for the purposes of improving the efficiency of its biological engineering services.
In other words, the biotech is going to start implementing artificial intelligence (AI) in another layer of its business. The arrangement is a natural fit for Ginkgo's automation-first approach to providing its biofoundry and biosecurity services, though it's unclear how much money the collaboration is worth.
But does the work with Alphabet make it a buy, or is this stock still too risky to touch?
Betting on AI sounds smart right about now
Ginkgo's business model is to help customers design, test, and culture genetically engineered microorganisms. Its value proposition is making the typically very-high-friction cellular engineering process into one that's seamless, thereby dramatically lowering headaches and costs. To accomplish that, it aims to rely heavily on automation at every point, from planning through execution, using a variety of technologies ranging from AI to robotics.
So the collab with Alphabet will likely make the earlier steps of the process, which are reliant on software for genetic engineering and manufacturing workflow planning, a bit easier. In the long-term, the use of AI, perhaps including what's being developed with Alphabet, will help the company realize the economies of scale in biomanufacturing that it has long claimed exist.
For now, Ginkgo remains deeply unprofitable, and its trailing 12-month operating margin is worse than it was two years ago. On the bright side, in Q2 alone, its biofoundry services segment brought in $44 million, up 72% from a year prior. It also initiated 21 new cell engineering programs with customers, bringing its total to 105. But until those scaling efficiencies can increase the margin, adding more revenue and adding more programs just means it'll be burning money faster regardless of whether it's using AI.
There's more than a few drivers for success
So on its own, the new collaboration isn't a reason to buy this stock, even if it might eventually help to address core issues like efficiency.
Still, in the company's larger context, Alphabet is only the latest addition to the roster of high-profile Ginkgo collaborators. The company counts powerhouses like Merck among its partners, and the pair initiated an additional deal worth up to $490 million on August 7 with the goal of improving the efficiency of the manufacturing of biologics.
It's also collaborating with Moderna, Novo Nordisk, and Eli Lilly, among many other major businesses in biopharma and agriculture. The takeaway for investors is that there are a lot of big players that find Ginkgo's pitch to be compelling because it could help them with their pain points. And that's bullish.
Plus, it isn't as though the biotech is about to run out of money. It has more than $1.1 billion in cash and investments, and its operations only burned $297 million in cash over the last 12 months. Therefore it still has plenty of time to test its thesis that scaling up its biofoundry will be the ticket to profitability.
The fact of the matter is that it's quite risky to invest in a company that hasn't yet proven its core business model is viable. Nor has Ginkgo made much in the way of progress on that front. Nonetheless, if it succeeds, it'll be an incredibly valuable business -- and one of the biopharma sector's go-to collaborators for all kinds of drug development services. Also, it might one day reach a similar status for multinational agriculture players, and even in certain industrial chemical segments as well.
The rewards for those who invest now could be considerable, so if your risk tolerance is such that you are comfortable with potentially losing a lot of your investment in exchange for potentially picking up a multi-bagger over the next decade or so, buy away. Just be sure to recognize that Alphabet's recent contribution to Ginkgo's success may be marginal.