Down 86% this year, is Ginkgo Bioworks stock a bargain now?

Let’s just say last year was tough for investors Ginkgo Bioworks (DNA -13.85%) would be an understatement of the highest order. As of August 14, shares of the synthetic biology stock are down 86% in 2024.

A low price isn’t the only way the stock market has signaled low expectations. Ginkgo shares traded at a strongly negative enterprise value.

It’s a debt-free company that ended June with $730 million in cash and cash equivalents. Still, the stock has been knocked down so badly that you could buy every outstanding share for just $524 million at recent prices.

DNA Market Cap Data by YCharts.

Paying less than cash for a cutting-edge life science deal seems like a great deal. Again, stocks generally don’t trade at negative enterprise values ​​unless investors have good reason to expect steep losses.

Let’s weigh the reasons to buy Ginkgo against the reasons to avoid the stock to see if it’s a bargain at the low price.

How Ginkgo stock could outperform

Ginkgo Bioworks is at the forefront of the burgeoning synthetic biology market. Other companies employ it to breed new microorganisms, such as yeast and bacteria, that produce high-value ingredients such as new therapies, food ingredients and chemicals traditionally derived from petroleum.

The company’s automated foundry reduces the costs associated with designing new bodies. Lower foundry costs aren’t the only advantage Ginkgo has over potential competitors. He accumulates data every time he operates his foundry. Over time, it can mine its data warehouse for insights that make its operations even more efficient.

It still hasn’t been able to cope, but a reduction in staff will reduce expenses. In June, the company began laying off 35 percent of its workforce, which should begin to reduce operating expenses by about $85 million annually by the end of 2026.

Ginkgo started 18 new cell engineering programs in the second quarter. These contracts vary, but most include downstream income opportunities. Not every program will be successful, but referral payments and royalties from just a few could drive total revenue to new heights.

Why is the stock going down?

Shares of Ginkgo Bioworks fell as the business oozes cash as a fast-growing start-up trying to gain market share. Losses wouldn’t be such a problem if his business was growing fast, but the opposite is happening.

In the first half of 2024, Ginkgo reported total revenue that fell 42% year over year. Total operating expenses fell, but not by enough, and the company lost $383 million in the first half of the year.

A downsizing is the right move, but it’s like putting a Band-Aid on a gunshot wound. At its current rate of cash burn, Ginkgo will have to ask investors for more capital long before the latest staff cut hits the estimated $85 million in annual savings.

A deal now?

The stock has been cut to negative enterprise value, but it’s only a bargain if you expect it to stop bleeding and turn a profit soon. Unfortunately, this does not seem likely.

Ginkgo was founded in 2008 and as of June 30 had completed 129 programs, in addition to the 140 it had running. If his foundry was truly valuable to the clients who hired him, there would be a ton of referral payments and royalty income to report.

Unfortunately, royalties still do not represent a significant amount of total revenue. Moreover, the company has not reported any milestone payments this year.

Recently, management has begun removing the downstream value share from certain types of programs. This seems like a step in the right direction that could lead to more predictable cash flows, but it still doesn’t make the business a wise investment.

Ginkgo Bioworks stock might seem like a negative enterprise value business, but it’s not. Regardless of your risk tolerance, this stock is best avoided until the bottom line moves into positive territory.