Investors are always on the lookout for a promising growth story. But some of those stories can have bad endings. Similarly, an investor might notice a particular industry looks like it’s on the cusp of incredible growth, but that doesn’t mean just any stock with exposure to that industry will do well.
Biotech company Ginkgo Bioworks (DNA 0.94%) specializes in using genetic engineering to produce bacteria with industrial applications. It doesn’t cater to a single industry, instead offering a cell programming platform that can help a wide array of businesses. But because it’s trying to expand its offerings widely, its efforts seem to be in perpetual startup mode and it could be many years before that pays off for Ginkgo. In the meantime, the company is incurring staggering losses.
Given all this, what kind of story are investors seeing here? Is this a stock you should consider investing in today, or is it still too early to determine if this is a tragedy or a success story?
Ginkgo Bioworks delivers some encouraging results
In January, Ginkgo released preliminary numbers for the full-year 2022 that indicated strong growth. The company expects its total revenue to come in between $460 million and $480 million. At the midpoint, that’s a 50% increase from 2021 sales totals. It also comes in well above the guidance it posted at the start of the year for revenue to be between $325 million and $340 million.
The company’s full results will be available in March, at which point investors will be able to see if there was also progress on the company’s bottom line. It’s that end of the earnings report that has been a sore spot for the business with Ginkgo reporting a net loss of $3.6 billion over the trailing 12 months (through the end of Q3).
The potential is there for Ginkgo
Growth stocks often require patience on the part of the investor. Losses will be inevitable for Ginkgo’s foreseeable future as the company spends heavily on research and development. R&D spending over the past four quarters was triple its revenue ($1.9 billion versus $528 million).
The carrot for investors is the mammoth potential out there for Ginkgo once it has established a firm hold in the market. The company’s investor presentation cites a report from the McKinsey Global Institute that projects up to a $4 trillion market for bioengineered products, which Ginkgo helps companies develop. the caveat to that report is that forecasting period runs from 2030 to 2040. Anytime you’re dealing with forecasts that far into the future, there’s risk that a lot will change in the meantime. It is nonetheless a promising opportunity that involves multiple industries, including healthcare, food and agriculture, consumer goods, materials and energy, and others.
In the meantime, Ginkgo’s business needs to be strong enough to survive long enough to capitalize on those opportunities.
Ginkgo has been burning through tons of cash
The key number investors should focus on when Ginkgo reports earnings next month is its cash situation, as that has been a growing problem for the company:
If that cash burn worsens, it could put a strain on the business, potentially leading to supplementary stock offerings in the future and dilution of each share’s value. That’s not a great situation for a stock that is already trading down 63% in the past 12 months. Further stock offerings could send the company’s share price into even more of a tailspin.
The good news is that, for now, Ginkgo is well-funded. As of the end of 2022, its cash balance was around $1.3 billion.
Should you invest in Ginkgo today?
Ginkgo has achieved some impressive growth, but its balance sheet is far too speculative for this to be a stock I’d seriously consider investing in right now. It could be a long time before the company becomes profitable — assuming it can be, given its high expenditures. While Ginkgo’s stock has the potential to double in value, there’s also the chance it can crash even further down based on its cash burn and huge net losses.
Unless you have a high risk tolerance and are willing to wait years for the business to turn things around, you’re better off buying other growth stocks. It definitely looks to be too early for most investors to buy shares of Ginkgo right now.
David Jagielski 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.