Ginkgo Bioworks: Massive Revenue Warning (NYSE:DNA)

One of the most disappointing names in the market in recent years has been cell programming and biosecurity company Ginkgo Bioworks (NYSE:DNA). The company has failed to meet its lofty growth expectations, causing shares to plummet from the low double digits to under $1 a share. After the bell on Thursday, the company reported awful Q1 results and issued a massive revenue warning, and the worst for the stock may not yet have come.

My previous bearishness:

I have been negative on the stock for some time, as it has failed to hit revenue targets for the past few years. At the same time, large losses have led to sizable cash burn, while investors have been diluted a bit from stock-based compensation. Since I last covered the stock in March, shares have cratered nearly 40%, while the S&P 500 has eked out a small gain in this period. That article came at the company’s Q4 report, where management guided to 2024 revenues well below street expectations, and unfortunately for investors, the situation has worsened quite a bit since.

The Q1 revenue disaster:

For the quarter, revenues came in just above $38 million, down almost 53% year over year and dramatically missing estimates by more than $8 million. While a sizable decline was expected from the wind down of K-12 Covid testing in Ginkgo’s Biosecurity segment, the company also showed an 18% drop in its Cell Engineering segment, which is supposed to be the growth engine for the company. While analyst estimates have plunged over the past year plus, as seen below, Ginkgo management warned that this year would be much worse than originally expected.

Ginkgo revised its expectation for Cell Engineering services revenue to $120 million to $140 million in 2024, cutting both ends of the range by $45 million. As a reminder, when the company went public through a SPAC a couple of years ago, it guided to this segment itself doing $628 million of revenue in 2024. The forecast for Biosecurity revenue was maintained, but the company’s overall guidance midpoint of $180 million for the year was well below the more than $223 million analysts were expecting, even after all those estimate cuts.

Losses and cash burn lead to reorganization:

As the company has continued to disappoint on the top line, overall spending has remained out of control. While operating losses did improve over the prior year period’s nearly $216 million, Q1 2024 still saw an operating loss of over $178 million. Management announced a plan Thursday to target a reduction in annualized run-rate operating expenditures of $200 million by mid-2025, but that still could mean roughly half a billion dollars in annual operating losses. Below the operating line, interest income is also coming down as the company burns through its once large cash pile.

The company did have cash and cash equivalents as of the end of the first quarter of $840 million, although that number was down about $100 million sequentially. While the balance sheet is still in fairly good shape, cash burn from operations was more than $336 million in 2023 alone, and the company is years away at best from becoming cash flow positive. While I don’t expect any capital raises in the short term, this will be something to watch, perhaps next year if things don’t really start to improve. One saving grace here is that the company doesn’t have any debt currently.

Valuation high / reverse split chances increase:

Speculative biotech companies like this usually trade at well above average market multiples because of the potential for tremendous revenue growth. The average price to sales ratio for names in the S&P 500 is in the high 2s right now if we look at this year’s sales estimates. Even with Ginkgo shares down about 15% in early Friday trading, the stock still goes for more than 9 times its expected revenue this year, and it’s not even growing its top line, even if we take out the year over year expected decline from Biosecurity. The new forecast implies that Cell Engineering revenues will be lower this year than in 2023, so it’s hard to argue paying a huge premium for this stock right now.

I mentioned in my previous article the possibility of a reverse split. With this Q1 report being quite awful to say the least, and the stock dropping to about 80 cents, the company may need to get its share price back above $1 in the coming quarters to avoid being delisted. That would likely be the next major negative catalyst to hit here, assuming of course we don’t get another revenue disappointment at the Q2 report. The company also filed an S-3 statement after earnings, detailing that some current holders are looking to sell up to 18.85 million shares of stock.

Another potential large negative here could be a major supporter finally giving up on the name. High-profile ETF company ARK Invest has maintained a significant stake in Ginkgo, even adding more last Friday. Cathie Wood’s firm has accumulated almost 183 million shares of the company, with about 70% of that being in the flagship ARK Innovation ETF (ARKK) and the rest being in the ARK Genomic Revolution ETF (ARKG). This total holding represents just under 11% of Ginkgo’s Class A shares (the ones that trade in the market), so if ARK changes its stance, any sales here could represent a major overhang on the stock.

Final thoughts / recommendation:

It’s hard to think that Ginkgo could have really announced anything worse on Thursday. The company fell well short of Q1 revenue estimates, reporting revenues that were more than sliced in half over the prior year period. The Cell Engineering segment, which is supposed to be the major growth driver here, is now losing sales, which forced management to slash its revenue forecast for the year. Less than two years ago, this was a company that the street saw doing over $5.5 billion in total cumulative revenues from 2024 to 2027, but this latest disappointment will likely push that estimate under $1.5 billion. While Ginkgo announced a plan to cut costs over the next year plus, it is still losing tons of money and burning through quite a bit of cash.

While Ginkgo shares are down another 15% Friday and are just a few cents from their recent all-time low, I have to maintain my sell recommendation today. The latest revenue warning now means that the Cell Engineering segment is expected to post a sales decline this year, which is not good for a stock trading at a significant premium to the overall market. While the revised operating plan should help over the long run, we needed to see efforts like that start much earlier. With shares continuing to be under pressure, chances of a reverse split increase, so another new low this year wouldn’t surprise me.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.