2 Big Risks and 2 Big Opportunities for Ginkgo Bioworks Stock

When a stock you own is struggling to hold onto its value, it pays to know what new problems may await in the future. To have the conviction to hold onto your stock through a decline, you’ll also need to appreciate future opportunities that could make your patience worthwhile.

Ginkgo Bioworks (DNA -5.64%) it now faces a pair of big risks, but it also has a pair of big opportunities that could be enough to turn its fortunes around. For reference, its shares are down 90% this year so far. So let’s look at the pitfalls and possibilities, to see if the balance between risk and reward is likely to improve.

These two intertwined risks could sink the stock

The most ambitious part of Ginkgo’s vision is to become a large-scale, hyper-efficient producer of bioengineered organisms, proteins, other biomolecules—and laboratory data. It hopes to serve customers in biopharma, agriculture and other sectors. It also plans to offer drug discovery services as well as optimization services for modified proteins and antibodies.

All these offers are quite complicated to provide.

There is no one-size-fits-all solution to making a particular protein of interest, nor is there yet a way to bioengineer different organisms in a fully automated fashion. And while Ginkgo’s continued investment in developing modular and automated lab work cells could be paying off, in the second quarter the company reported an operating loss of $223 million. In the same quarter last year, operating losses were $184 million.

The big risk is that its operating efficiency, and therefore its overall profitability, will continue to deteriorate further into the red, rather than improve. It’s currently laying off staff and consolidating locations in hopes of saving $200 million in annual operating expenses by mid-2025, so the risk could soon be mitigated thanks to management.

These cuts could exacerbate the other significant risk — that once costs are under control, its target customers may not find the value proposition sufficiently valuable.

As mentioned, Ginkgo has a large array of services to choose from today. It needs to achieve significant efficiency gains, which it will pursue in part by standardizing its offerings to make them as automated as possible.

But for its clients, especially big pharmaceutical companies, its willingness to take on specialized or niche programs could be a significant element of the appeal of working with Ginkgo. If streamlining it means giving up some of the more complex custom solutions it’s currently capable of, revenues will likely drop.

At the same time, they may not be able to reduce their costs enough to offer their clients a better deal than what they could solve themselves by outsourcing rather than outsourcing a project. If so, there won’t be as much incentive to collaborate, which is a major risk.

Key opportunities will take time to exploit

On the flip side of these two risks lie a pair of big opportunities. If the biotech can rationalize its costs over the next couple of years, there’s a substantial chance it can make progress in both.

The first opportunity is for Ginkgo to become a preferred biopharma research and development (R&D) or manufacturing partner. To achieve this, they need to impress their current customers, especially the big ones Novo Nordisk and Merckby inexpensively managing scientific and manufacturing workflows that their staff find cumbersome or excessively capital intensive. If it can realize a significant and growing revenue stream from royalties or milestone payments generated by commercialized drugs developed in collaboration with Ginkgo, that would be a sure sign to investors that its business is growing.

The second opportunity is for the company to become a preferred biosecurity service provider for the world’s governments and institutions. In short, biosecurity involves the processing of many diagnostic tests administered to populations under surveillance for a specific biological threat, such as a virus. So in theory, its highly automated lab facilities could be set up to cheaply offer such screening for various threats, making it a vendor that cash-strapped administrators turn to again and again.

For the first half of 2024, its biosecurity services brought in around $30 million, just under half of its $64 million in cellular engineering services revenue. Importantly, the biotech only spent about $21 million to generate biosecurity revenue, so expanding the segment would help boost its margins. As public interest in controlling the coronavirus pandemic continues to wane, the most likely place for Ginkgo to find growth in its biosecurity segment would be testing for emerging diseases such as H5N1 (“bird flu”) or mpox, which they may not be considered urgent. to address.

Overall, there is significant uncertainty as to whether Ginkgo can take advantage of its opportunities while avoiding these risks. In the next couple of years, this uncertainty should be largely resolved, although the company may not yet be profitable. Watch the earnings for the rest of this year to give you an idea of ​​whether an investment looks favorable before the biggest challenges are close to being resolved.