Ginkgo Bioworks (DNA 4.08%) is your classic high-risk, high-reward investment. The cell programming company isn't generating great results right now, its operations remain unprofitable, and it's burning through a ton of cash. But if you're bullish on the company's outlook and its long-term opportunities, there is definitely reason to be optimistic that it could easily double or triple in the long run.
Let's look at where Ginkgo Bioworks could be five years from today, and whether it's a good stock to hang on to until then.
AI could open up more opportunities for Ginkgo
Ginkgo has a ton of potential because it uses genetic engineering to help companies develop new products and fine-tune their existing processes. It can help in multiple industries, and it has been locking up some deals and partnerships with many top companies.
One of them is with Pfizer. Earlier this year, the companies agreed to collaborate in an effort to advance the development of RNA-based drugs, and to improve the drug discovery process.
In August, management also said that it would be working with Alphabet, specifically Google Cloud, to develop an artificial intelligence (AI) platform that will help Ginkgo's customers speed up the innovation process. It is optimistic that with AI, it can help undertake more-difficult challenges and problems for companies, leading to more opportunities (and deals) for itself down the road.
NYSE: DNA
Key Data Points
Investors shouldn't expect profitability
These types of deals, while promising, will take time to lead to anything, assuming they do at all. But this also tells investors that the company is still in research and discovery mode, and that while it might secure more deals, and revenue should increase, costs will as well. Thus, investors shouldn't expect a big improvement in the bottom line.
In many ways, the next five years will be a testing ground for Ginkgo to prove just how viable its business is, and whether all these deals and companies that it has been partnering with will pay off.
But one thing appears certain: Ginkgo is going to remain in the red for a while. The company has regularly incurred losses, and over the trailing 12 months they have totaled $859.8 million -- far more than the $315 million in revenue the business has generated during that time.
The company is going to need to spend heavily on research and development to work on the various platforms it's developing, and so it's hard to see a scenario where costs aren't going to rise significantly.
Dilution might be a problem
Another concern for investors is dilution, and how many shares Ginkgo will need to sell to keep its operations going. Given that its costs are going to increase as it spends more on the deals it is securing, it is probable that its cash burn will worsen as well.
Over the first nine months of 2023, the company used up $237.7 million in its day-to-day operations. At the same time last year, it burned through just $147.7 million. Since the start of the year, the company's cash and cash equivalents balance has fallen from more than $1.3 billion to less than $1.1 billion.
And with no end in sight to cash burn and its potential acceleration, Ginkgo could need to rely on stock offerings to help fund its operations. That could exacerbate problems for investors since this has already been a struggling stock, with shares down 30% in the past 12 months.
Is Ginkgo Bioworks a stock worth buying?
When the stock began trading in September 2021, its valuation was around $15 billion. Today, it has a market capitalization of just $3.2 billion. The timing of its initial public offering helped the company secure a high valuation because it happened at a time when investors were bullish on meme stocks and risky growth investments. But it unfortunately set the stock up for a valuation that was simply too rich at the start.
Over the next five years, I don't expect a big turnaround in the business. While Ginkgo's revenue will grow, its costs are sure to increase as well. Simply locking in and securing more deals is not enough to expect that the business will be in a better place five years from now.
Overall, Ginkgo isn't a stock I would invest in given its poor financials and how unproven the business still is today. The good news is that at least five years from now, investors should have a better grasp of what shape the business is in and how viable its operations are. For now, investors are better off taking a wait-and-see approach. This remains a highly risky stock to put into your portfolio.
