In the last three months, Ginkgo Bioworks' (NYSE: DNA) shares fell by 50%. To the enterprising investor, such a decline by the Boston-based biotech specialist isn't necessarily a sign of disaster, and in fact could well be a sign of an opportunity to buy shares at a discount -- assuming those shares can be reasonably expected to rise again in the future.
Is that the case with this company, or would it be better to look for opportunities elsewhere? Let's dive in and figure it out.
A few core issues will take a long time to address
On May 9, Ginkgo reported its first-quarter earnings, and, by some measures, it missed the mark. Revenue from its biofoundry segment was $28 million, 18% less than a year prior. While it succeeded in adding 17 new cell engineering programs within the foundry segment, indicating that there's no lack of other biopharma businesses interested in collaborating with it for a fee, it's still deeply unprofitable.
Management thus announced a cost-cutting program that aims to reduce expenses by $200 million annually, to be completed before the midpoint of next year. Part of that plan will require slashing labor costs by 25%, which means that there are likely layoffs coming, including from its key research and development (R&D) staff. Ginkgo will also be consolidating its foundry lab spaces, potentially reducing its footprint by as much as 60%.
Concerningly, management is signaling that its cellular engineering services may be streamlined. The bespoke and highly flexible nature of its biofoundry is a major aspect of the company's appeal to its customers. If its current degree of versatility relative to customer needs is ultimately too expensive to maintain, its addressable market will become significantly smaller, and that will have negative ramifications for the stock price.
If the cost cuts go as planned, leaders expect the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to reach breakeven on an annualized basis before the close of 2026. At that point, it will probably still not have a positive net profit margin under generally accepted accounting principles (GAAP). But at least investors now have an idea about the path toward greater profitability.
Shareholders may have a bumpy ride along the way. Management believes it will only bring in up to $140 million in cell engineering services revenue for 2024, as a result of slower-than-expected ramping up of revenue from existing programs, as well as potential cost cuts.
Furthermore, the company is explicitly telling investors that the number of new programs onboarded to its biofoundry each quarter is "no longer the most relevant metric for the business." Previously, that same metric was one of the ones routinely touted as essential to appreciating Ginkgo's progress in scaling up the capacity and capabilities of its platform. The shift in messaging may portend a slowdown in the number of new programs added relative to prior years.
Such a change wouldn't be a bad thing, if it was a conscious decision that's part of the drive to make the company more profitable. On the other hand, in the unlikely scenario that the reason is that new customers are getting harder to come by, the picture would be more foreboding, as revenue growth is already a problem.
Risks are not decreasing as quickly as expected
At the end of Q1, Ginkgo had $840 million in cash and equivalents. Its trailing-12-month operating expenses were $898.3 billion. Even with the cost-cutting campaign, this business will be increasingly tight on cash over the next couple of years.
It currently has no long-term debt, though it does have $221.8 million in long-term capital lease obligations. That means it will be able to borrow money to raise cash, and issuing more stock is a possibility too. Ginkgo thus looks like a very risky stock right now.
There's no guarantee that it will be able to make good on offering industrial-scale low-cost bioengineering and biomanufacturing services to other biopharma businesses, and progress so far has been lacking. The company's timeline for stopping the hemorrhaging of cash is rather long, and its access to capital to get from here to there may not improve.
Don't buy the dip unless you're willing to hold onto your shares through the end of the decade and accept steep losses along the way. Even then, don't bet the farm on Ginkgo.
There is a possible scenario where it becomes a massive and profitable purveyor of in-demand biotech services, but it needs to show a clear trajectory toward that goal for Ginkgo stock to be highly appealing.
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Alex Carchidi 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.
