Ginkgo Bioworks (DNA 10.60%) has a lot going for it. It's a favorite of Cathie Wood's Ark Innovation ETF, it's a popular collaborator in the biopharma sector, and its positioning at the intersection of biotechnology, artificial intelligence (AI), and laboratory robotics means that it's exposed to a lot of exciting and value-enhancing developments.
But does that make it a buy, or just another stock getting hyped by the tech-hungry investors of the current bull market? Here's what you need to know.
Why this company is probably going places
When biopharma businesses need to manufacture a large quantity of a biological reagent or product of some kind, they often choose to outsource it. But in order to outsource the process properly, they have to define the steps the contractors need to do to fulfill the specification. And in the context of bioengineering tasks for biomanufacturing purposes, that can be a tall order as the processes and technologies used for laboratory-scale work tend to be very different from the processes used for mass production.
Ginkgo Bioworks aims to address that issue while also providing sought-after biomanufacturing services. In a nutshell, the company's idea is to be a biofoundry, which means that it'll take designs for customized biological outputs like proteins or cells, and then implement a tailored manufacturing process that results in customers receiving those outputs at (ideally) industrial scale. By relying as heavily as possible on automation of the cognitive and manual work involved, it hopes to be more efficient than what customers could manage on their own.
What each customer needs from Gingko Bioworks is somewhat unique and usually more complicated than a basic pharmaceutical manufacturing routine. But there is evidence that capable players are finding real value in working with Ginkgo: Novo Nordisk, Pfizer, and many other biopharmas and agribusinesses are already running programs on its platform.
In fact, it added 78 new programs in 2023 to reach a total of 162, and it was running more than twice as many programs for customers in pharma than it was two years prior. That led to the segment bringing in revenue of $44 million last year out of a top line of more than $251 million.
Ginkgo isn't yet profitable on an operational basis. But as its biofoundry gains more customers, more programs, and more throughput, it could be able to drive its costs of servicing each program downward. Then it could undercut the other biological manufacturing businesses while potentially returning capital to its investors as well. And that'd make it a smart purchase today -- if it happens.
There are a few concerns to be aware of now
The main argument for not buying Ginkgo stock is the company's difficulty in maintaining a steadily growing base of revenue. Furthermore, its expenditures are soaring in absolute terms, as well as when expressed as a proportion of revenue. Take a look at this chart:
DNA Revenue (Quarterly) data by YCharts
In the eyes of the critics, the reasons for those issues are fundamental to the business model. And on that point, they are correct. There is no way to avoid incurring massive capital expenditures while building a biofoundry platform, much like with the semiconductor foundries the concept is based on.
Bioreactors, analyzer devices, laboratory robotics, and other major pieces of biofoundry equipment do not necessarily have any acceptable substitutes that are both cheaper and capable of handling the same throughput. Likewise, there is no way to avoid inefficient use of those capital resources when operating at anything other than a large scale.
In other words, if Ginkgo cannot achieve the economies of scale that management thinks exist by onboarding more and more programs until its capital investments see a good rate of return, there is little reason to think that it can survive or be a good investment over the long term.
Without the ability to drive down its costs and pass those savings on to its customers, they may decide to defect to another contract development and manufacturing organization (CDMO) or clinical research organization (CRO). While Ginkgo has succeeded in adding more and more programs over time, the actual financial data do not suggest that things are going according to plan on that front, though that could easily change.
Thus, for investors who are concerned with conserving their capital or getting a relatively safe and consistent return, this is not the right stock. On the other hand, if you have a long time horizon for your investment, and if you are comfortable with the idea that the shares could continue to fall rather than rise until Ginkgo's core issues are sorted out, it could be a decent option.
Just remember that if and when the main business model risk is convincingly resolved, it probably won't ever trade at much of a bargain compared to now.
