Ginkgo Bioworks Stock Just Got a Whole Lot Riskier
One thing you learn in risk management class is that risk can be defined as the volatility of returns. It’s a way of not thinking about up or down, but rather the stability of a stock price. From that you can infer that stable stock prices are more desirable. So, when volatility gets introduced to a stock, it becomes less desirable.
We admitted to having a crush on synthetic biology darling Ginkgo Bioworks (DNA). Even though it was a special purpose acquisition company (SPAC), we still loved it so much we broke our own rules and made “a small bet” earlier this year.
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.Credit: Nanalyze
We tell people over and over not to invest in stories, yet that’s what we did. At that time, we had no simple valuation ratio rule to keep us from buying a stock whose ratio was sitting at 100 at the time. (Ginkgo’s current simple valuation ratio sits at 125.)
Another mistake we made was investing in a SPAC before the merger had completed. We realized the error of our ways, sold our DNA shares (notifying our premium subscribers when we did), and vowed to check back after the merger had completed. So, here we are. The merger has completed, but the last 24 hours couldn’t have been crazier for Ginkgo Bioworks. Just yesterday, short seller Scorpion Capital published a brazen report on Ginkgo Bioworks, outright accusing them of fraud.
The Background Story
To fully understand this story, you’ll need some background. Less than a month ago, Scorpion Capital wrote a scathing report about Berkeley Lights (BLI), something we covered in a piece titled Why We’re Selling Berkeley Lights Stock. The same day we published that piece, Ark Invest’s analyst posted a response to the BLI Scorpion report on Twitter that concluded with “even though I may disagree with some things, I thank the author for their diligence.”
The following day, BLI filed an 8-K with the SEC that contained a terse “you should have come and talked to us” response. We then watched ARK’s analyst on Twitter further address the Scorpion Report again in a series of tweets that concluded with “this is one of the worst short reports I’ve ever read.” Those tweets have since been deleted.
On September 17th, ARK published the below in their “Stock Commentary” email:
We weren’t able to find the BTIG report referenced above, nor have we seen additional commentary coming from ARK on the BLI topic. That same day, ARK’s analyst can be seen hamming it up at the Ginkgo Bioworks Wall Street debut.
Fast forward to today and it’s been 24 hours since the Scorpion Capital report on Ginkgo Bioworks was published. A quick look at Twitter shows no comments from this analyst on Scorpion’s accusations. We haven’t seen any comments coming from ARK Invest, aside from their purchase of around 8.2 million DNA shares yesterday, which presumably is helping support Ginkgo Bioworks’ stock price. As for Ginkgo Bioworks, they haven’t had any formal public communication responding to the report yet (more on this in a bit). That’s concerning.
We always advise investors not to pay much attention to the background noise of what active portfolio managers are getting up to, but we’re quite surprised that ARK hasn’t commented on this report as they did with the BLI report. Did they fully vet Scorpion’s 175-page report on Ginkgo and dismiss everything contained within? Or was this a knee-jerk reaction that amounts to a pissing contest between ARK Invest and Scorpion Capital?
Scorpion Capital vs. Ginkgo Bioworks
Why do short sellers feel the need to create 175-page sloppy PowerPoint-like presentations to get their point across? After about 20 pages in, it becomes exhausting to continue, but the accusations couldn’t be more serious:
- …in our opinion, one of the most brazen frauds of the last 20 years
- …a contender for the Hall of Shame, if not a 6am raid by the Feds and some perp walks.
- …BLI looks like Berkshire Hathaway in comparison
The first 34 pages of the report consist of 21 interviews which we glossed over. Anyone can find disgruntled employees to talk smack about their current or past employer. But pages 35-46 are insightful.
The premise is quite simple. Ginkgo and its investors have created and funded seven entities which then simply return the cash which gets recorded as revenues.
These “revenues” have made up a majority of Ginko’s “foundry revenues,” something the company openly states in their financials.
Then there are “deferred revenues” which refer to work that has been paid for but not completed. What the below implies is that Ginkgo Bioworks will keep drawing down these deferred revenues over time in place of actual revenues.
One could argue that this isn’t a scam but part of Ginkgo’s master business plan – to develop subsidiaries to commercialize products they’ve invented on their platform. In that respect, these are actual revenues and there’s nothing shady about it. Everything is out in the open for everyone to see. Perhaps the real sin being committed here is that of an excessively valued company selling a grand narrative to a bunch of future bag holders.
It’s Not a Scam, It’s a Scheme
Another notorious short seller, Citron, chimed in with some comments that began with “it’s not a scam, it’s a scheme.” They talk about something we pointed out in May – Ginkgo Bioworks went from a $4.2 billion valuation before the SPAC to a $20 billion valuation after the SPAC. Was $15 billion worth of value created in less than a year’s time?
Citron talks about how Ginkgo’s biggest shareholder, a hedge fund called Viking Global, was investing in Ginkgo at around a $200 million valuation. They have every incentive to prop up Ginkgo Bioworks to the highest valuation possible so they can maximize their return on investment. That’s how Wall Street works. Everyone involved in that SPAC deal walked away a winner. (The shell company that Ginkgo merged with walked away with half a billion dollars’ worth of stock.) It all points to our repeated criticism of SPACs – everyone wins except the retail investor. Citron closes off their short commentary piece with this bit of wisdom.
The proper piece of advice here is… find a way to invest in Viking… not Ginkgo Bioworks.Credit: Citron
Our Thoughts FWIW
Having a rules-based strategy for investing in tech stocks makes life so much simpler. We don’t buy stocks with a simple valuation ratio over 40. For Gingko Bioworks to reach that level, shares would need to trade at $3.57. Here’s the math.
- Current market cap – $22 billion
- First half of 2021 revenues – $87.73 million
- Annualized revenues ($87.73 million * 2) = $175.46 million
- Current simple valuation ratio = 22 / .17546 = 125
- Implied market cap for simple valuation ratio to equal 40 is around a $7 billion market cap which equates to a share price of $3.57
The question becomes, if shares of Ginkgo Bioworks trade at $3.57 a share or less tomorrow, would we go long? Right now, absolutely not. For the company to not publicly address such scathing accusations is suspicious. If everything Scorpion Capital said was a lie, Ginkgo Bioworks should be threatening them with a lawsuit and accusing them of libel. For ARK Invest to step in and support the share price, without explaining why the report should be outright dismissed, raises further questions. This is peculiar behavior all around.
(Update 11/29/2021: Ginkgo Bioworks Responds to Short Seller Report)
It’s comprehensible that the structure of companies Ginkgo Bioworks has created is being operated without malicious intent. Perhaps every one of their subsidiaries is actively developing products that will be taken to market with major royalty streams to arrive further down the road. But if you take another look at their glossy SPAC deck, and then have a look at where their revenues are coming from today, there seems to be a large disconnect. What Ginkgo Bioworks needs to do first and foremost is address these accusations. While their CEO made some dismissive remarks to Markets Insider, that hardly seems like a sufficient response.
“Our focus at Ginkgo is increasing the scale of our platform so we can deliver more cell programs to customers,” Gingko’s CEO and co-founder Jason Kelly told Insider in a statement on Thursday.
One thing the report criticizes is that new startups are launching programs on Ginkgo’s platform and leveraging its platform to secure capital, get resources, and launch their new company quickly, he added. “We don’t think that is a problem – starting a biotech company should be as easy as launching a website!”Credit: Markets Insider
Dismissing the report and hoping the bad man will go away isn’t going to assure investors who probably have a lot of questions, especially if they were able to suffer through that entire 175-page diatribe.
Since we have no dog in the race, our interest will only perk up when shares of Ginkgo Bioworks fall within our target valuation range of 40. Until that happens, we’ll be sitting on the sidelines watching the drama unfold. (Grabs popcorn.) If you’re currently holding shares of DNA, know this. Regardless of how truthful that Scorpion Capital report is, shares of Ginkgo Bioworks just got a whole lot riskier.
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