A couple of years ago, companies were going public left and right. Many of these businesses were smaller enterprises seeking access to capital markets without going through the typical filing and underwriting process with investment banks. The option these companies chose was to go public through a special purpose acquisition company (SPAC). For a fleeting moment, SPACs became all the rage.
One such company was biotech Ginkgo Bioworks (DNA 10.60%). Ginkgo Bioworks specializes in biosecurity and synthetic biology processes. The company has gotten a lot of attention from Wall Street, but the jury is out on whether Ginkgo can pull off its vision.
One of the most bullish investors in Ginkgo Bioworks is Cathie Wood, the CEO of Ark Invest. Just in October alone Wood has bought roughly 5 million shares in Ginkgo Bioworks across several of her exchange-traded funds (ETFs). Let's dig into Ginkgo's operation and determine if the stock is worth a closer look for your portfolio.
A costly operation
Biosecurity and cell programming are big markets possibly worth trillions of dollars across multiple industries, including pharmaceuticals, agriculture, and even artificial intelligence (AI). But while the allure of such a large and prolific market can be tempting, investors should understand the costs necessary to build these innovative advancements. The figures below undermine how much research and development spending goes into Ginkgo Bioworks.
| Item | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 |
|---|---|---|---|---|---|
| Revenue | $144,618 | $66,398 | $98,285 | $80,702 | $80,568 |
| Research and development | $289,188 | $259,580 | $181,155 | $162,639 | $144,282 |
| Other Operating Expenses | $502,338 | $459,839 | $151,638 | $133,808 | $120,437 |
| Net income (loss) | ($670,570) | ($669,055) | ($174,154) | ($204,969) | ($173,315) |
| Cash and equivalents | $1,377,152 | $1,302,603 | $1,315,792 | $1,206,086 | $1,105,787 |
Data source: SEC Filings. Figures reported on a Generally Accepted Accounting Principles (GAAP) basis. Dollar amounts in thousands.
There are a couple of takeaways I'd like to point out given the financial profile above. First, the company's revenue is lumpy. Part of this is driven by the company's biosecurity segment, which experienced more pronounced growth during the peak of the COVID-19 pandemic. Moreover, a lot of Ginkgo Bioworks' revenue is tied to how many programs the company is working on and at which stage. This is important as the company receives payments based on milestones achieved over the life of a specific program. Another important item to point out is that Ginkgo Bioworks is not yet profitable on a generally accepted accounting principles (GAAP) basis. Investors can see that the company has burned roughly $270 million in cash just over the last year.
Given the heavy costs required to fund its research and development, investors may be wondering what tailwinds the company has and how those could jump-start growth in an environment where peak COVID trends have, for now, appeared to subside.
Image source: Getty Images.
What catalysts are on the horizon?
One of the more impressive features of Gingko Bioworks' business is the caliber of customers and partners it has acquired. According to a recent investor presentation, Ginkgo works with pharmaceutical giants Novo Nordisk and Eli Lilly, the developers of wildly popular treatments including Ozempic and Mounjaro. Novo Nordisk is working closely with Ginkgo's cell programming capabilities in an effort to hone its own development processes for medications aimed at diabetes and obesity.
The company also works with vaccine maker Moderna, the chemicals division of the Japanese conglomerate Sumitomo, as well as food and agriculture giant Cargill. More recently, the company announced a deal with Pfizer worth up to $331 million. As part of the deal, Pfizer will be working with Gingko to further advance its RNA technology and development process.
All of the companies pointed out above can be considered market leaders. Despite Ginkgo Bioworks' size, the company is being taken seriously by best-in-class enterprises. So while the top-line growth may not appear robust on the surface, the company's relationships with major players in healthcare and agriculture shouldn't be discounted. These are precisely the types of partnerships that could become far more valuable in the future.
Another interesting item to point out is the company's leadership. The chairman of the board of directors is Shyam Sankar, the chief operating officer of Palantir Technologies (another Cathie Wood favorite). While it's hard to draw any concrete conclusion as to how Ginkgo is benefiting from Sankar's involvement, I view his position on the board in the same way I view the company's client roster. In other words, Ginkgo Bioworks is clearly getting a nod of approval from well-respected businesses and leaders, which could bode well for its future.
Should you invest in Ginkgo Bioworks?
Despite Ginkgo's progress, there is a lot that it still needs to prove. On one hand, working with the biggest drug makers in the world should not be discounted. But on the other hand, the cash burn is hard to ignore. My hunch is that Wood in particular is buying shares in droves in an effort to dollar-cost average. She has been purchasing stock in the biotech for quite some time, including when it was trading at all-time highs. Now as the stock has returned to orbit, she likely is using the depressed price action to lower her cost basis.
The biotech world in particular has seen start-ups with similar attributes. For example, blood-testing company Theranos was once considered a unicorn and had a number of high-profile investors, board members, and employees. Unfortunately, the operation was a better marketer than innovator, which ultimately led to its downfall.
To me, investing in Ginkgo Bioworks is similar to a venture capital (VC)-style deal. Generally speaking, a venture capitalist has a higher risk profile compared to most investors. VCs often invest in start-ups early and support them through subsequent capital raises. Over time, the venture capitalists build large ownership positions in these businesses, providing the potential to generate large returns. However, many VC investments do not pan out. This is why they are considered high-risk, high-potential-reward investments.
Ginkgo seems different to me. While the company's revenue profile is still very much cyclical, I think the long-term story is worth buying into. Real progress is being measured in tandem with industry leaders and the company is posting legitimate sales. It's simply growth that needs to follow. I think the stock is worth a small position given where it's trading. Although investors will need to keep a keen eye on Ginkgo's developments, there is enough data to make a compelling case here.
