Why Ginkgo Bioworks Stock Soared Yesterday
Admittedly, this is a clickbait title. Nobody is capable of deciphering why stocks move the way they do which is why hedge funds are now dominated by algorithms with a vociferous appetite for big data. However, we do know two things are true – Ginkgo Bioworks released their 10-K annual report yesterday, and the stock was up +22% on the same day. It’s probably not a coincidence, so let’s sift through the filing and see what insights can be gleaned.
Ginkgo Bioworks 2021 Results
The last time we looked at this synthetic biology darling was in a piece titled Ginkgo Bioworks Responds to Short Seller Report at which time the firm had a market cap of nearly $18 billion. Based on pure Foundry revenues alone, we concluded that shares of Ginkgo Bioworks would need to trade at $2.69 a share or lower before we would consider investing in them. Now that the company’s valuation has dropped 62% over the past four months, and we have new revenue data to work with, we can recalculate the simple valuation ratio to see if it’s more favorable. First, let’s start by reviewing how 2021 went for Ginkgo Bioworks aside from that scathing short report.
We’ll start with the most important metric – Foundry revenues – which came in at $113 million for 2021, about 13% over their SPAC deck estimates. Even more impressive was the changing ratio of related-party revenues (bad) to third-party revenues (good).
An increase in third-party Foundry revenues is exactly what we’re looking for. For 2021, 41% of the $113 million in Foundry revenues came from related parties while around 21% was attributed to two equity payments from Cronos Group (the cannabis company relationship structured with milestone payments instead of royalties). We’re told that two customers accounted for 17.0% and 10.5% of the Company’s total revenue, though we’re not told if that falls under Foundry revenues or Biosecurity revenues. Speaking of which, their pandemic pivot is proving to be quite lucrative, at least for now.
The Biosecurity revenue outlook for 2022 is around $160 million with Ginkgo planning to change its reporting structure in Q1-2022 to formalize Concentric (their pandemic pivot) as a separate business unit giving them two revenue segments: “Cell Programming / Foundry” and “Biosecurity.”
Ginkgo’s year-end presentation spends a lot of time talking up the opportunity (yes, we know) and explaining away the decline in share price as a net present value calculation that’s now discounting future rewards (that’s correct indeed). Speaking of which, we’re particularly keen to see some revenues start to flow from royalties.
For the years ended December 31, 2021 and 2020, royalties did not comprise a material amount of our revenue.Ginkgo Bioworks 10-K
Waiting for Royalties
Similar to our recent articles on AbCellera and Recursion Pharmaceuticals, a large part of Ginkgo’s appeal is all that high-margin revenue that will begin to flow down the road in the form of royalties from successful products. A key milestone that will help validate the Ginkgo platform is when these types of revenues start to be recognized, something that hasn’t happened yet (Cronos equity payments aside). They can’t be far away though, because Ginkgo’s annual report talks about “late-stage examples” of client engagements that have now been completed and should start to bear fruit soon.
Investors should pay close attention to when these royalties start flowing in as they will demonstrate an end-to-end example of how this platform adds value for shareholders. If their customers cannot successfully bring products to market, there will be no royalties for Ginkgo Bioworks. In their year-end call, the company commented, “we do have downstream value share baked into the 2022 guide and that is a component of the growth over 2021.” For 2021, they’re talking about the $24 million in milestone payments from Cronos Group, so we’ll be curious to see what sort of downstream value gets realized in 2022.
Another metric Ginkgo focuses on is the number of programs they’re running at any given time across industry verticals. The below chart talks about how verticals such as “Consumer & Technology” will have a quicker time to market than those that require a great deal of regulatory approval like “Pharma & Biotech.”
In their 10-K, Ginkgo provides a useful breakdown of Foundry revenues by vertical. Below we can see the impact of the Cronos Group payments reflected.
We were puzzled as to why Ginkgo Bioworks incurred operating losses of $2.14 billion in 2021 of which $1.8 billion was incurred in Q4-2021. Details in the 10-K show that the Board of Directors modified the terms of restricted stock units (RSUs) so that they vested immediately. This resulted in $1,492.2 million of incremental stock-based compensation expense in the fourth quarter of 2021. The company also talks about an additional $2.2 billion of stock-based compensation expense that hasn’t yet met “the service-based vesting condition as of December 31, 2021.” This amount will be recognized over a weighted-average period of 1.6 years. Only one analyst on the year-end call remarked “that’s a big number, the stock comp number, by the way.” Yes, $3.7 billion of stock-based compensation does seem high, especially when you consider what’s happening in the ivory tower.
It’s understood that your Chief Operating Officer and Chief Executive Officer should be compensated commensurate to the value they’re bringing to the table. Ginkgo might have successfully listed and exceeded all their public KPIs in 2021, but shareholders should ask themselves this. Did these two individuals add enough value in 2021 to justify total compensation of $364 million each?
Those amounts reflect the “full grant-date fair value of restricted stock units granted during 2021,” and the share price has fallen since then. Still, even at today’s share prices, these compensation numbers seem excessive.
Stock compensation can be a controversial and complex topic, so we’ll try to keep this simple. The CEO and COO (both who are co-founders) now wield 49.7% voting power and took in combined compensation in 2021 of over $728 million. If you’re a shareholder in this company, wouldn’t you rather these rewards were spread out over time and tied to key milestones rather than given all at once? As of December 31, 2021, there were still 200,569,979 shares available for grant under the 2021 Plan, which means there are plenty of rewards left to dispense, not to mention the $2.2 billion of stock-based compensation to be realized in the next 1.6 years.
Valuing Ginkgo Bioworks
As we discussed before, we only want to consider Foundry revenues when valuing Ginkgo because that’s the exposure we’re looking for. That number was $34 million in Q4-2021 so here’s what our simple valuation ratio looks like:
- Market capitalization / annualized revenues
$6,824 / ($34 * 4) = 50
That’s better than before, but still above our cutoff of 40. If we take this a step further and remove related-party revenues, then the valuation jumps even higher. For Q4-2021, Gingko’s Foundry revenues minus related-party revenues came in at around $24 million giving us a ratio of around 71. At least we’re out of the triple digits.
Our simple valuation ratio falls only when the stock price falls or revenues rise. If we take the midpoint of the forecasted Foundry revenues for 2022 – $172.5 million – that moves our simple valuation ratio to just under 40 given Ginkgo’s market cap today. We’re in no hurry to invest in any company, so we’ll be watching from the sidelines until the valuation falls to an acceptable level.
At today’s market cap of $6.82 billion, Ginkgo’s valuation is still too rich for our blood. If this is the company that leads the bio revolution with trillions of dollars in economic value to be captured, they’re only just getting started, and we’re happy to wait until they’ve matured a bit more. None of this FOMO stuff.
Ginkgo is on the right track when it comes to growing third-party revenues and segmenting the business into Biosecurity vs. Foundry. Given how highly compensated Ginkgo Bioworks employees are (especially the two at the top), we’re expecting great things from the company in 2022.
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