Ginkgo Bioworks Stock is a Risky Bet on Synbio
We always say you shouldn’t invest in stories, but sometimes it’s so darn hard not to. That’s because deep down inside, we all like to have a punt now and then. It isn’t often we’re compelled to invest in teams with dreams, but Ginkgo Bioworks tempts our risk-averse nature like few others have.
Since we first covered the company back in 2016, we’ve been excitedly watching them raise wheelbarrows of cash while touting an organism engineering platform that will finally allow mankind to realize the promise of synthetic biology. Today, they gave us some bittersweet news. They’re going public (yay!), but using a special purpose acquisition company (SPAC) called Soaring Eagle Acquisition Corp (SRNG). (Rolls eyes.)
About Ginkgo Bioworks Stock
By now you should know the story and understand what all the excitement is about. (If not, our last piece on Ginkgo Bioworks Scales Biology for Industrial Synbio is a good refresher.) The investor section of Ginkgo’s website is adorned with a simple statement – “we are cell programmers.” That should tell you all you need to know. Nature is the most powerful technology known to man. Learning how to tweak Nature’s recipes, and then selling these organisms to large companies, sounds like a great business model. But it’s that same business model that’s both a blessing and a curse.
Let’s start with the good news. Ginkgo is doing what we’d hoped and selling organisms across a diverse set of industries – 70 major customer programs in total.
All too often we’ve seen synthetic biology companies start with this promise of an industry-agnostic manufacturing platform, then end up selling apple slices before pivoting off into the distance. Ginkgo appears to be doing what everyone else was trying to do – manufacturing organisms for various industry participants while making money doing so. The problem is they’re not using a software-as-a–service (SaaS) business model, but rather a hybrid that takes a lot of faith to believe in.
Ginkgo’s Business Model
Ginkgo’s flagship platform – The Foundry – is currently driving revenues in the form of upfront payments from customers to fund R&D costs. There’s also some special COVID stuff happening, what they’re accounting for as “Biosecurity” below.
That’s not what’s supposed to get you excited. It’s what Ginkgo calls “downstream value.” The below slide shows how Ginkgo plans to drive future value for their shareholders – downstream value – that you need to believe is on its way to fully understand the company’s potential:
What you see above is a business model that emphasizes a great deal of value to be generated down the road from product sales – either in the form of royalties or in equity in the customers they’re servicing. These aren’t just any old revenues, they’re royalties or stock grants, which means they’ll nearly all go to the bottom line when recorded. Essentially, this is free cash that will start pouring in for Ginkgo to fuel future growth. We know absolutely nothing about these royalty streams (20 of them) or equity grants (34 of them) except that the latter are supposed to have a net-present-value of $500 million.
We’ve heard this same song and dance so many times before that we’re having to put a lot of faith in these future promises, especially when we’re being asked to pay such a ridiculously high valuation for an asset with so many unanswered questions.
To Buy or Not to Buy
The Unanswered Questions
Not having an S-1 to pore over means we have loads of unanswered questions. For example, our last piece on Ginkgo Bioworks talked about these companies they’re spinning out and investments they’re making. Is that equity that’s on the balance sheet today? Major or minor, and at what value?
Then there are these little gems in Ginkgo’s Summary Risk Factors document:
“Our revenue is concentrated in a limited number of customers, some of which are related parties,” and, ” customers and potential investors, may be skeptical of our ability to deliver on our research and development capabilities because they are based on a relatively novel and complex technology.”Credit: Ginkgo Bioworks
How can there be revenue concentration risk with the 70 customers Ginkgo has using their platform? Are some being charged only royalties or equity? Speaking of royalties, what do these agreements look like? Then there’s the comment about how what they’re doing is so magical that some people won’t believe it. For their customers, it’s either going to work or it isn’t. The value of the platform will become apparent very quickly if Ginkgo fails to receive royalties while revenues from The Foundry flatline.
There are so many unanswered questions that investing in Ginkgo right now seems like pure speculation. And whenever you speculate, you do so with very little money that you wouldn’t feel much pain if lost. Furthermore, it’s an easy case to make that Ginkgo shares could trade much lower in the future.
The Valuation Problem
Let’s start with the elephant in the room. Ginkgo Bioworks is currently valued at $4.2 billion on the CB Insights Unicorn List and they took their last round a year ago (says Crunchbase). That means you’re paying 3.5X what sophisticated institutional investors valued the company at a year ago. Using the simple valuation metric we’ve been introducing lately – market cap / annualized revenues – shows Ginkgo at a very high valuation. Here’s a small universe of life sciences stocks we can use as a benchmark (the smaller the number, the better the valuation or the less anticipation there is of future growth).
The basket average is 27 while Ginkgo’s is 100. To calculate their valuation ratio, we took the $15 billion number they’re being valued at for the transaction, then divided it by 2021 expected revenues of $150 million. Here’s how that number changes over time based on their revenue forecasts:
- 2021 (15 / 0.150) = 100
- 2022 (15 / 0.175) = 86
- 2023 (15 / 0.341) = 44
- 2024 (15 / 0.628) = 24
- 2025 (15 / 1.099) = 14
This is where you need to start
drinking the Kool-Aid believing in this talented team of visionaries that are set to do nothing short of changing the world as we know it. A green new world of clean manufacturing is finally here, and you get to invest at the ground floor. Kind of.
When we imagine a bright future for Ginkgo Bioworks, we see a several hundred billion dollar firm with rich margins that just pours forth cash which they use to acquire new and exciting stuff, replicating their prior successes, and becoming synthetic biology’s Microsoft. If that ever happens, we want skin in the game. So, we opened what equates to about one-fifth a normal position size in our portfolio. (We have 33 holdings in our current tech portfolio. An even weighting across all would be 3.03% weighting for each stock. Our current weighting in Ginkgo Bioworks is 0.61%.)
All I Need is a Little
Some investor once said, “If it’s the next Microsoft, all I need is a little. If it’s not, I’ll only be glad I put down a little.” When we’re speculating, we don’t get greedy. If Ginkgo Bioworks was priced at the same valuation as the basket average we mentioned earlier – a ratio of 27 – their market cap would fall to $4 billion which would give them a current share price of $2.80, a fall of about -72% from where it sits today. That could happen. There is none of what technical traders refer to as “support” here. So, we’re simply putting in some chips and waiting until we get more clear signs their business model is working as expected. An S-1 sure would have been helpful to make a decision with, but we can’t blame Ginkgo for grabbing the easy SPAC cash and just reiterating the great story they’ve been telling investors since 2009.
We’re really trying to avoid adding new tech stock positions (and failing miserably at it), as we’ve been propping up existing positions that are well below our cost basis – and making a few new investments as well. This eats up cash, and we’re now at 26% cash in our portfolio, down from 30% at the start of the year. (We’d still like some exposure to proteomics, but need some time to see if a leader starts to emerge.) So, it was with a great deal of reluctance – and at the same time lots of joy – that we bought shares in Ginkgo several minutes after reading their deck. The story was everything we imagined it would be and more. We’ll be watching closely to see how it unfolds over time and will revisit the company when they’ve filed some proper documents with the SEC, not this glossy deck rubbish.
Lastly, it’s worth mentioning who you’re investing alongside. The news release says institutional investor participation included an anchor investment from Baillie Gifford. According to their November 2020 Interim Report, Baillie was already an investor in Ginkgo’s Series E which closed in September 2019, something we mentioned in our recent piece on Investing in SpaceX with Baillie Gifford US Growth Trust.
That means Baillie believes it’s worth paying a whole lot more to increase their exposure to Ginkgo Bioworks, but by how much we’ll need to wait and see (should be disclosed in Baillie’s fund report once the deal finalizes.)
ARK Invest is also a new investor in Ginkgo as part of the transaction which will provide up to $2.5 billion of primary proceeds. The boards of directors of each of Soaring Eagle and Ginkgo have approved the transaction which is expected to close in the third quarter of 2021. When the deal closes, the ticker will change from SRNG to a new one that’s currently undecided.
Having rules is no fun unless you’re allowed to break them every once in a while. We’ve been condemning SPACs from the highest mountains, yet here we go again, buying another (the only two other SPACs we’re holding are Desktop Metal and Spire Global). Our small position in Ginkgo Bioworks means we’ll be watching the company a whole lot closer going forward.
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