Thanks to its promises of low-cost bioengineering and biomanufacturing services, Ginkgo Bioworks (DNA -2.66%) could one day be the kind of biotech that everyone else in the biopharma sector wants to work with to advance their own products. Delivering on those plans would make it a smart stock to own as well.
But for now, it's still trying to find its footing, and it's a riskier bet than investors may realize. So without further ado, here are three critical things you'll need to understand if you're interested in buying its shares today.
1. Its biofoundry runs on custom-built laboratory-automation hardware
Ginkgo's biofoundry, which it also refers to as its cellular engineering-services segment, has one very complex, high-level goal. That goal is to provide a platform that biotech and pharma companies can pay to access in order to design, bioengineer, and cultivate purpose-built microorganisms, like yeast, at scale, such that the customer's desired outputs, like biomolecules or even entire organisms, are generated in suitably large volumes.
Therefore, the company needs to have many different types of laboratory hardware working together in synchrony, at large scale, and preferably with very little human intervention except to start or stop the process. Other factors, like making the process of organizing the hardware into the configurations necessary to serve a customer's needs, and breaking the custom-built system down into its reusable parts after the customer's order is fulfilled, are also important.
To attain its goal, Ginkgo has invented what it calls reconfigurable-automation carts (RACs). You can think of RACs as mobile enclosures for scientific experiments that can be equipped with laboratory hardware and configured such that the output of one device is passed along to an adjacent RAC for the next step in the experimental or production protocol.
That way, by stringing a bunch of RACs together, with each handling a different step of a protocol, the company can theoretically create a fully automated and highly customized workflow to meet customer needs. Plus, because RACs are on wheels and have been designed to be easy to set up and wind down, staff don't need to spend as much time configuring each new automation workflow, at least in theory.
In practice, keen investors will immediately recognize that the economics of producing and operating a sufficient number of RACs relative to demand is a make-or-break issue for this stock.
Though data on the topic is scarce, the cost of the enclosures themselves is probably not going to break the bank. But the company's commitment to RACs as its primary automation unit is a trade-off; there is simply no way that a series of versatile units organized in series is going to be anywhere near as efficient as a custom-built, high-throughput solution that only does one thing.
Time will tell whether RACs can deliver efficiency that's high enough for the business to maintain a solid operating margin.
2. Cash is tight, and expenses are high
Per its first-quarter earnings report on May 9, Ginkgo Bioworks had cash and cash equivalents of $840 million on hand. Its total operating expenses for the same period were $215.9 million, and its net cash decreased by $102.3 million.
What investors need to know before buying the stock is that it can't sustainably keep spending money at the current pace while it continues to be unprofitable.
So it shouldn't be much of a surprise that it announced a cost-cutting campaign which aims to reduce expenses by around $200 million annually by the middle of next year. The company will specifically try to slash its personnel expenses by 25%, meaning that many of its skilled and hard-to-recruit staff will probably be headed for the door.
At the same time, it has enough of a runway that investors don't need to panic. Just be aware that the company has a limited amount of time to start producing a bit more cash.
3. It's at risk of being delisted from its stock exchange
Ginkgo's stock is down 42% over the last 12 months. Therefore, its share price, currently around $0.74, is below the minimum bid price of $1 required by the New York Stock Exchange, where it's listed.
On May 7, it was warned of this issue by the exchange as its share price has been below the minimum bid for the previous 30 trading days consecutively. Now, it has six months to regain compliance or it will be delisted. Getting delisted would be disastrous, but it probably won't happen. The company could do a reverse-share split, if necessary, or it could try to announce a major new initiative that spurs investors to buy enough to drive the price up.
Still, if you're thinking about buying it now, you should definitely know that the risk of delisting is now in play.
