Ginkgo Bioworks Stock Just Got a Whole Lot Riskier
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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.
Conclusion
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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If you look at 3 stocks: Ginkgo Bioworks (DNA), Berkeley Lights (BLI) and Oxford Nanopore (ONT.L): the first 2 are very risky and expensive (especially after the shortseller reports), but Oxford Nanopore looks like a real deal. Long term you will want to have Oxford Nanopore in your portfolio.
We consider opening a position in Oxford Nanopore if it can achieve a simple valuation ratio of 40 or less – either by increasing revenues, or through a falling share price.
Where does that leave Twist Biosciences when Ginkgo makes up pretty much the entire SynBio business?
Very good question.
From the Twist Bioscience 10-K:
In fiscal year 2020 we served approximately 2,200 customers and reported $90.1 million in revenue, including $29.1 million in revenue to the chemicals/materials sector, $40.0 million in revenue to the healthcare sector, $19.6 million in revenue to the academic research sector and $1.4 million in revenue to the food/agriculture sector. The industrial chemicals sector includes sales of $10.4 million to Ginkgo Bioworks, Inc., which we believe is the largest purchaser of synthetic DNA.
And also below
Our largest customer Ginkgo Bioworks, Inc. accounted for 12%, 17% and 34% of our revenues for the fiscal years ended September 30, 2020, 2019 and 2018, respectively.
It’s great to see their reliance on a single customer – whether Ginkgo Bioworks or any other firm – decrease over time.
let’s not forget that Ginko has a boatload of money now and that will buy lots of DNA for a long time. What Ginko does with it is another issue but it will not run out of buying power for a long time meanwhile unless it increases purchases significantly it looks like its significance will continue to diminish as other business continues to grow
Spot on comment.
It’s worse than you think, “Amyris” shows up a few times in the Scorpion report. This is big because it shows Ginkgo’s platform will never work even if they perfected their platform and I can provide proof.
Ginkgo, Zymergen and others have platforms that can create and fine-tune new SPECIES of microorganisms.
Amyris perfected working in this phylum and realized that no natural yeast or bacteria can ever produce at scale. So they did a “heart and lung” transplant on yeast. Essentially creating a new GENUS specifically designed to be a mini biofactory.
Ginkgo is sitting on thin air, because even if they perfect their platform, they will hit a wall because no natural organism can have truly good yields.
Consider dogs, Ginkgo and everyone are making super Chihuahuas, what Amyris has made you can’t even consider a “dog” anymore. It’s a vicious beast with only one purpose in life – to make molecules.
Proof can be located in Amyris subreddit.
*Please give a shout out to the Amyris subreddit if you like this info. We work hard.
Thank you for the comment. We don’t allow links in comments as a policy, but people can find the subreddit easily enough. As for Amyris, we don’t care for their business model – selling FMCG is not what they should be focused on – and also noted a number of risks that keep us from finding the stock to be compelling: https://nanalyze.com/2021/06/amyris-stock-ingredients-synbio/
We’re well aware that quite a few pundits have exactly the opposite feeling about Amyris and we can see the high-risk bullish argument. In examining Ginkgo further, they appear to be moving in the same direction which is to sell their own products – they’re only doing it in a different manner by creating new companies. We would really like to see these companies working with multiple large industry names to bring products to market. Charge for product development (consistent recurring revenues) and then take royalties down the road. That’s supposedly what Ginkgo is doing but it remains to be seen.
Please hear me out… The business model is not the main issue. There is a hidden issue and that is the organism. Where they even begin their bioengineering.
Everyone in the world is using different species of yeast or bacteria.
Amyris realized you can NEVER get good yield from yeast or bacteria…
They implanted the metabolic pathway from Lactobacillus Reuteri into Saccharomyces
Cerevisiae (is this really yeast anymore?). They poured 70M into R&D every year creating this mutant organism (and 250 commercial producing strains)
The core of everything is the mutant organism that is neither yeast nor bacteria – but a mutant biofactory.
It takes them 6 months to take any molecule to scale. All they are lacking is capacity.
The reason Amyris is going solo is because with their mutant organism and their super manufacturing process, no one in the world will be able to match their prices.
Once Amyris is set up with dozens of manufacturing plants in Brazil, it will likely sell Fermentation Kits.
Amyris is going solo because they put patent mines everywhere (922 patents/applications) and that will prevent anyone from copying them. Amyris own industrial fermentation with this move.
If you’d like me to link you proofs of this, I can. It explains why Amyris beat Ginkgo/Cronos in getting CBG to market.
It’s a great story, but we don’t invest in stories. Our piece explains why we’re avoiding Amyris. The red flags we found go beyond just the business model.
Thank you for engaging with us on the topic, but we’re not here to talk about the bullish case. That’s discussed in plenty of places. We’re risk averse investors so we always look for reasons NOT to invest in a stock, and we found plenty of reasons with Amyris.
There are 2 biotech stocks I see as a great buy now. One of them is: Biolife Solutions (BLFS). Biolife Solutions provides tools and services to the cell and gene therapy (CGT) industry. The share price is low now (not far from 52 week low) and the company is already profitable. Market cap around $1B – so it fits Nanalyze criteria. I think that stock is a perfect fit with Nanalyze strategy.
Product lines: Biopreservation Media, Cryogenic Storage Solutions, Cold Chain Management, Precision Thawing Solutions.
Thanks for the heads up Stan. We have that company in our queue to take a look at.
This niche opens up a rabbit hole of other life sciences tools companies that provide pick-and-shovel value propositions. We’re already pretty overweight life sciences so we’re not actively looking for new plays in this space. Nonetheless, we always examine all firms our subscribers raise as you know 😉
DNA went from $10 to $1.66 now and it looks like the fall may continue .. It doesn’t look like a bargain ..
It doesn’t look like a bargain (from our perspective) because pure Foundry revenue growth isn’t there last time we checked. We’ll revisit the company in early 2023.