When a stock you own is struggling to retain value, it pays to know what new problems might lie awaiting in its future. To have the conviction to retain your shares through a dip, you'll also need to appreciate the upcoming opportunities that might make your patience worth the while.
Ginkgo Bioworks (DNA +2.21%) is facing a pair of big risks right now, but it also has a pair of big opportunities that could be enough to turn its fortunes around. For reference, its shares are down by 90% this year so far. So let's dive in and examine the pitfalls and possibilities, to see whether its balance of risk to reward is likely to improve.
NYSE: DNA
Key Data Points
These two intertwined risks could sink the stock
The most ambitious part of Ginkgo's vision is to become a large-scale and hyperefficient manufacturer of bioengineered organisms, proteins, other biomolecules -- and laboratory data. It hopes to serve clients in biopharma, agriculture, and other sectors. It also plans to offer drug discovery services, as well as optimization services for engineered proteins and antibodies.
All of those offerings are quite complicated to provide.
There's no one-size-fits all solution to manufacturing a specific protein of interest, nor is there yet a way to bioengineer different organisms in a fully automated fashion. And while Ginkgo's continued investment in developing modular and automated laboratory workcells may pay off down the line, in the second quarter the company reported operating losses of $223 million. In the same quarter last year, its operating losses were $184 million.
The big risk is that its operating efficiency, and thus its overall profitability, will continue to deteriorate further into the red rather than improve. It's currently laying off staff and consolidating locations in hopes of saving $200 million in operating expenses annually by the middle of 2025, so the risk may soon be mitigated thanks to management.
Those cuts could exacerbate the other significant risk -- that once costs are under control, its target customers may not find its value proposition worthwhile enough.
As mentioned, Ginkgo has a large platter of services to choose from today. It needs to realize significant efficiency gains, which it will pursue in part by standardizing its offerings to make them as automatable as possible.
But for its customers, particularly large pharma businesses, its willingness to take on specialized or niche programs could be a significant element of the appeal of working with Ginkgo. If its streamlining means giving up on some of the more complex bespoke solutions it's currently capable of, revenue will likely fall.
At the same time, it may not be able to drive its costs down sufficiently to offer its clients a better deal than what they could finagle themselves by insourcing rather than outsourcing a project. If so, there won't be as much of an incentive to collaborate, which is a major risk.
Key opportunities will take time to exploit
On the flip side of these two risks is a pair of big opportunities. If the biotech can rationalize its costs over the next two years, there's a substantial chance it will be able to make inroads on both.
The first opportunity is for Ginkgo to become a preferred research and development (R&D) or manufacturing collaborator in biopharma. To accomplish that, it needs to impress its current clients, especially bigwigs like Novo Nordisk and Merck, by inexpensively handling scientific and manufacturing workflows that their staffs find cumbersome or overly capital-intensive. If it can realize a significant and growing revenue stream from royalties or milestone payments generated by commercialized medicines developed in collaboration with Ginkgo, that would be a surefire signal to investors that its business is increasing.
The second opportunity is for the company to become a preferred biosecurity services provider to the world's governments and institutions. In a nutshell, providing biosecurity involves processing lots of diagnostic tests administered to populations under surveillance for a given biological threat, like a virus. So, in theory, its highly automated laboratory facilities could be configured to cheaply offer such screening for various threats, thereby making it a vendor that cash-constrained administrators reach out to again and again.
For the first half of 2024, its biosecurity services brought in around $30 million, slightly less than half its cell engineering services revenue of $64 million. Importantly, the biotech only spent roughly $21 million to generate biosecurity revenue, so scaling up the segment would help to pump up its margins. With public interest in controlling the coronavirus pandemic continuing to ebb, the most likely place Ginkgo would find growth in its biosecurity segment would be in testing for emerging diseases, like H5N1 ("bird flu") or mpox, which may not be seen as urgent to address.
Overall, there's significant uncertainty about whether Ginkgo can make good on its opportunities while avoiding these risks. Within the next two years, that uncertainty should be largely resolved, though the company may not yet be profitable. Keep an eye on earnings for the rest of this year, to get a sense of whether an investment looks favorable before its biggest challenges are close to being resolved.
