It has been difficult to be a shareholder of Ginkgo Bioworks(NYSE: DNA) over the past year. The stock has collapsed about 72% from its peak last summer.
The company's cell engineering foundry is an amazing accomplishment, but sales have stagnated. If this business only needs a little more time for the industries it serves to notice its capabilities, investors who buy now could be greatly rewarded.
Let's weigh the reasons to buy Ginkgo Bioworks against the apparent risks to see if it could be a smart buy on the dip.
Reasons to buy Ginkgo Bioworks
The company's cell engineering platform combines robotics and artificial intelligence (AI) to produce new cell lines for its clients. This is important because many top-selling drugs are manufactured by genetically modified cells that produce a specific protein.
Disrupting the biopharmaceutical manufacturing industry could be extremely lucrative and it isn't the only way Ginkgo's cell engineering platform can earn money. For example, it recently partnered with plant-biotech company GreenLab to mass-produce brazzein, a naturally occurring sweetener.
In addition to a cell foundry, Ginkgo owns a diagnostics business that responded rapidly to the COVID-19 pandemic. Diagnostic service sales have fallen since COVID is no longer a public health emergency, but the segment still generated $10 million in topline revenue during the first quarter.
Reasons to avoid this stock
Although spending on research and development, as well as general and administrative expenses, has fallen, the company is still losing money. Ginkgo's operations lost $178 million during the first three months of 2024.
There's nothing wrong with highly disruptive businesses posting losses while their rapidly growing operations attain scale. Sadly, Ginkgo Bioworks' businesses aren't growing these days. They're shrinking at a frightening pace.
Diagnostics or "Biosecurity" sales collapsed by 71% year over year to just $10 million. The diagnostics industry is heavily regulated, so one provider is as good as another in the eyes of health plan sponsors. Expecting this segment to generate profits is probably wishful thinking.
Ginkgo's cell engineering partnership deals generally involve potential royalties and milestone payments but little to no financial commitment upfront. Unfortunately, Ginkgo's partners don't seem eager to implement their new cell lines.
Ginkgo was founded in 2008, and as of the end of March, the company had completed 119 unique programs. Downstream revenue should be jumping higher, but the opposite is happening. The company reported just $4 million in downstream revenue last year, down from $38 million in 2022.
Management isn't providing any guidance for downstream revenue this year, but at least it's addressing its broken business model. The company plans to structure future deals around upfront fees instead of royalties and milestone payments.
Wait and see
Ginkgo's cash balance fell to $840 million at the end of March after it lost $854 million over the previous 12 months. A fee-based approach will make cash flows more predictable, but that doesn't necessarily mean the company will stop bleeding money.
If Ginkgo runs out of cash before it starts breaking even, investors who buy the stock now could lose their shirts. Shares of the synthetic biology company have already fallen so far that it's in danger of losing its stock market listing.
On May 13, the New York Stock Exchange sent Ginkgo a notice that it has six months to regain compliance with the exchange's $1 per share minimum requirement. A reverse stock split could easily raise the price of its shares above the minimum threshold, but companies should avoid this solution. Stocks tend to experience renewed selling pressure following reverse stock splits.
Ginkgo Bioworks stock has fallen far, and there aren't any clear reasons to expect a rebound. It's best to wait for signs that its new business model can succeed before risking your hard-earned money on this stock.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
