Ginkgo Bioworks (DNA 10.60%) sells something very original: the large-scale design and production of organisms. And thanks to its innovations, the company has increased revenue almost 800% over the past five years. But Ginkgo's share price hasn't kept up, tumbling more than 80% from its initial public offering (IPO) just two years ago.
This isn't bothering famous investor Cathie Wood or Wall Street, though. Wood, known for her investments in undervalued innovators, has been steadily buying up Ginkgo shares over the past year. And Wall Street says the stock's time to shine may be right around the corner, with a prediction for a 140% gain in the coming 12 months.
Is that too optimistic? Let's find out.
Ginkgo's growth drivers
First, let's talk a bit about Ginkgo's business. The company designs, creates, and tests organisms on a large scale, through foundries, to serve a wide variety of clients, from pharmaceutical companies to flavor and fragrance customers. In fact, pharma and agriculture make up most of Ginkgo's active programs and represent the biggest growth drivers.
Ginkgo is working with Roche to discover potential small molecule drugs produced by bacteria, and it's also partnering with Synlogic to program probiotic bacteria to treat disease. And just recently, Ginkgo announced a collaboration with Pfizer for the discovery of RNA drug candidates, a deal that could represent as much as $331 million for the organism specialist.
Ginkgo also has used engineered yeasts to brew ingredients for flavor and fragrance clients. And these are just a few examples of how the company's platform is driving revenue growth. The list goes on and on, with active projects also in the industrial and environmental and consumer and technology industries.
Ginkgo has a biosecurity business too, and though growth hasn't been steady here, this could change in the future. That's because the company is building a system to identify biological threats anywhere worldwide and neutralize them. Ginkgo aims to detect threats using its vast collection of data and use artificial intelligence tools to generate intelligence -- then Ginkgo's discovery platform and big pharma partners could develop medical countermeasures.
So, the company clearly has big plans for the future, and if Ginkgo continues to grow its foundry and biosecurity businesses, earnings could take off. Today, though, while revenue has soared, Ginkgo hasn't yet been able to turn that into profit. And research and development costs have increased.
DNA Operating Income (Annual) data by YCharts
This isn't completely surprising for a company at this stage of its growth story. It's essential for Ginkgo to heavily invest today in order to ramp up its infrastructure and capabilities. Importantly, Ginkgo ended the most recent quarter with $1.1 billion in cash, enough, the company says, to serve as a "strong multiyear runway" as Ginkgo targets profitability.
Is Wall Street wrong?
Now, let's get back to our question: Even though Ginkgo is delivering revenue growth, is Wall Street too optimistic about potential stock gains? I think so. Here's why.
First, next year's average revenue estimates have declined in recent months -- and the level of expected revenue is less than last year's $478 million in total revenue.
DNA Revenue Estimates for Next Fiscal Year data by YCharts
Also, even as revenue has climbed in recent years, as mentioned, the shares dropped since their IPO. So if times of revenue growth haven't spurred share gains, I wouldn't expect the stock to soar in a slower period for revenue.
But this doesn't mean you should avoid Ginkgo shares. For investors with some tolerance for risk, now is a great time to follow top investor Cathie Wood and pick up shares of this innovative company, trading for less than $2 apiece today. Wood doesn't worry about near-term share moves and instead focuses on a company's long-term potential -- a great investment strategy, whether you're looking at Ginkgo or another stock.
Though Ginkgo shares may not take off overnight, the company has the platforms and partnerships that could spur gains over the long haul. And that could make it a winning buy today -- even if it misses Wall Street's targets.
