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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I was thinking there should be some affinity between Ginkgo Bioworks and Twist Bioscience (TWST).
You are correct. We’ve written about this relationship before: https://nanalyze.com/2018/10/twist-bioscience-stock-ipo/
Ginkgo is – at least as of several years ago – one of Twist’s biggest customers, so you definitely want to watch out for that when you consider diversification risk.
Fedral govt has provided 1.1B grants to Ginkgo. Thats a big number and I hope they are doing something right.
Reuters says, “U.S. loans $1.1 billion to Ginkgo Bioworks for pandemic effort.” If it were a grant then they wouldn’t have to pay it back. The idea of what Ginkgo is trying to accomplish is what people envisioned synthetic biology was all about. Now Ginkgo needs to take all their fresh capital and execute.
Great article. Before I drink the kool-aid in situations like this, where promised revenues are the big attraction to investors, I try to form an opinion of the leadership, specifically the CEO and/or CTO/COO. It helps make my decision about whether the company can execute on these promises easier.
Can you expand at all on where you go to form your opinions on a company’s execs, or if you don’t really bother outside of reading their press releases?
Quality comment here. We talk about exactly that in our investing methodology document: https://nanalyze.com/nanalyze-premium-articles/
Ginkgo’s investment deck talks up the leadership team for that reason. Investors need to understand who is making all these promises. One of the first things they tell you is that the founding team has been working together for twenty years on synbio – so we know they get along well. You have five founders who haven’t succeeded a single executive position to any outsider. We haven’t gone through all their LinkedIn bios, but it appears the team is heavy on the academic side and light on the commercial side. What may alleviate some of those concerns would be the gents on their board who have some heavy C-level experience. It’s a very risky stock no matter how you look at it. At the same time, you can’t help but want to root them on. If they truly – as their CEO said – can become the Amazon Web Services of biotech, the founders will have done something truly epic. A big validation milestone will be seeing meaningful royalties start to flow in.
Glad you enjoyed the piece and thank you for taking the time to make a very good point that the author missed.
To answer your question about where we go to form opinions on company execs, we’re mainly just looking at track records. If you founded and successfully liquidated company(s) before, we’re interested. That’s about the only way we can put any stake in promises.
I bought 500 for $9.90 the day of the annoucement. I find that since speculation left the SPAC’s about two month ago one does not have to pay much above the price. True it is risky like many of the other 26 SPACs I own. I got in on DM at 10 and saw it go up and back down. I have another printing stock spac AONE. Speaking of risky I have bought a number of 3d printer stocks and have nothing to show for it. Today I got a couple of voting dates. When I get the company the clock will start on what kind of an investment I have made. I still see a lot of value in SPAC. Opportunity to get into a good company, a company that will get funding as part of the deal, and will get the interest of a number of market makers. All 26 will not be esuccessful but then Babe never hit a homerun every time at bat. I have bought Spires twice since it came out.
Isn’t it great that SPACs actually trade at the transaction price now? Kind of a small thing to ask for – that retail investors should participate in the deal at the same price institutional investors do. You’ll never hear the King of SPACs talk about this problem as he babbles on about “democratizing access to wealth.”
We’ve often said that Ginkgo is probably the most exciting startup that we wanted to see go public. Of course, exciting companies are always risky. The stock could easily half on bad news, and then you need to decide if you double down. It could also double in price, but we’re happy to miss out on some upside tomorrow in exchange for taking on less risk today.
We like to buy slowly over time. So your 500 share purchase we would have made over an extended period of time – 50 shares a week for 10 weeks, as an example. There are no transaction costs for retail investors now so why not take advantage of that? Smooth out some of that market timing risk.
We started selling DM once it cleared 20 a share up until 25 a share and returned half our cost basis. All 3DP stocks were soaring for no apparent reason except for hype, so we couldn’t see a reason not to reduce our cost basis. We also bought Spire twice as you did.
We’ll only know over the long run whether SPACs have a lot of value. We’re now able to easily track the returns of over 40 SPACs so will be easy to monitor over time.
I am beginning to think GNPK has the best upside of any stock in my Portfolio. They are going to acquire Redline a space conglomerate that has acquired a number of space related entities with far out technology. And yes these companies have revenues in the form of NASA contracts. Beware there is a lot of hype surrounding this company. There is a person who is referred to as Daniel who has a nice piece on UTUBE. He must be well knowing as he goes by his first name. Sorry I don’t keep track of Gurus. The article is by Michael Scheetz. It would not be easy to do an article on this because it is a conglomerate. Personally I think this is one SPAC where the hype machine is still attached. Personally I think Space is the next real place to make or loose a lot of cash on the market.
We wrote about Redwire here: https://nanalyze.com/2021/05/disruptive-technology-spacs/
Problem is that they recently formed an entity and started making rapid acquisitions – then decided to SPAC it – and there’s no telling what it looks like until the dust settles.
How can that valuation be justified, when Zymergen Inc (ZY) is valued around $4.25 billion?
It’s an absolutely ridiculous valuation, agree. We have always been huge fans of Ginkgo, and this is one of the rare instances where we’re speculating and opening a very small position. (As opposed to investing and opening a meaningful position.) Skin in the game helps us keep an eye on them as well. We know, don’t invest in stories, we say it all the time. 😉
As for Zymergen, we’re not keen on their “build it and they will come” business model and their platform that has yet to be proven at scale, a problem that’s plagued many synthetic biology stocks before it.
Thanks for the article. I thought it was great too. What is it about Ginkgo that makes it so special relative to others like Zymergen or Codexis (or at least is perceived to be so special). Both of those companies will also do outsourced R&D and also have proprietary databases of code and IP (e.g., CodeEvolver or Biofacturing). I think it’s generally understood that Ginkgo’s foundry/automation might be better having invested so much into it. But, in terms of their Codebase IP portfolio, is that also leagues ahead of peers or enough to justify the much higher valuation? TIA.
Thanks for the comment Bo, and glad you enjoyed the article.
We were very surprised to see that Zymergen is using traditional manufacturing to produce their products without having actually mastered their synbio process yet which is very alarming. We covered that here: https://nanalyze.com/2021/03/zymergen-stock-manufacturing-nature/
As for Codexis, they have some customer concentration risk we can’t look past: https://nanalyze.com/2020/08/protein-engineering-stock/
Considering the Ginkgo leadership team is so strong academically, it would imply they believe their IP is solid and ahead of their peers. The only thing that justifies their extremely lofty valuation is the arrival of large royalty payments down the road.
Very hard to compare these three firms to try and find a “winner.” All three could succeed over time as there is so much potential in synbio. All three could fail as well, and that’s the risk that’s inherent to exciting tech stocks.
Seems nobody knows Amyris here, interesting.
Randy Baron from Pinnacle Associates discusses Amyris’s lead in synthetic biology
Nobody here knows Amyris? We just published a piece on it mate. Did you read it?
That’s great Randy Baron from Pinnacle Associates has an opinion on a stock. Unfortunately we don’t allow links in the comments section.
Thanks! No, I didn’t read it. Then, in the value comparison of different companies in this field, why you didn’t list Amyris?
Because the author didn’t decide to list it. We’ve covered practically all the synbio stocks out there. You can search for them from the nearly 2,000 research pieces we’ve published on this site.
Here is yesterday’s piece on Amyris: https://nanalyze.com/2021/06/amyris-stock-ingredients-synbio/
November 2020: The U.S. government has agreed to loan privately-held biotechnology firm Ginkgo Bioworks $1.1 billion for COVID-19 testing and the production of raw materials for therapies that may help address future pandemics.
Wonder what the interest rate is and how much of that loan Ginkgo availed themselves of?