cathi wood ARK Innovation ETF (NYSEMKT: ARKK) is known for its investments in breakthrough growth stocks backed by high-tech companies at the forefront of science, making ginkgo bioworks (DNA 7.82%) a very typical operation.
Using a relentlessly optimized symphony of robotics, genetic engineering, data science, and automated cell culture technologies, the company’s approach to providing cell-based manufacturing services is unprecedented. And with multiple potentially disruptive innovations in play, it could be a great investment for years to come.
In fact, its shares could even double in value in the next three years, even if it does not undertake additional new initiatives to expand its operations.
Foundry revenues are increasing
The most obvious reason Ginkgo stock could double before the end of 2025 is that demand for its core services is rising sharply, leading to very rapid revenue growth.
The business model of biotech is to take customer-supplied genetic blueprints for microorganisms and efficiently grow the bioengineered bugs at scale. The bacteria or yeast cells are then kept in bioreactors that feed them the necessary nutrients to produce what the customer specifies. They could be proteins for use in plant-based meat substitutes, small molecules for consumer products, industrial enzymes, or even nucleic acids used as components in certain drugs. At this time, management anticipates that the company will earn between $425 million and $440 million in total revenue by 2022, with up to $180 million coming from its biosmelter operations described above.
It also provides biosecurity services, primarily coronavirus surveillance testing for schools and airports, which is expected to raise more than $260 million this year. But Ginkgo’s long-term investment thesis hinges heavily on its foundry segment, as that is where it plans to create significant competitive advantages in the form of extensive automation of its cellular manufacturing operations.
And their foundry services are also where you have the best chance to double your value. In the second quarter, its foundry revenue soared 105% year-over-year, which significantly contributed to its 231% top-line growth compared to the same quarter of 2021. In the last 12 months, it added 14 new customers , a 64% increase, and more are likely waiting in the wings. Additionally, their investment in automation has reduced their unit costs for programming cells by around 50%. by year since 2015, which management says makes their approach at least five times cheaper than the alternatives.
So between its gold rush-like revenue growth, falling core costs, and a boon from biosecurity sales to support the top line…
Doubling in 3 years is still a long shot, but it could happen
Let’s do a backwards calculation to determine if this stock has a realistic chance of doubling in value in the next three years. Right now, Ginkgo’s market cap is around $4.5 billion, so in order to double, it would need to reach a market cap of $9 billion. The low end of management’s guidance for 2022 total revenue is $425 million, which will be our starting point.
Despite the tremendous growth of the company’s top line over the last year, it probably won’t be sustainable for three years, so we can’t assume increases of more than 100%. The good news is that if biotech can grow its revenues by 44% each year (a fast pace, to be sure, but much more plausible than anything above 100%) it will hit roughly $1.3 billion in sales before the end. 2025. And if we multiply that $1.3 billion by the stock price relative to sales (P/S) of 7.1, we get a market cap of just over $9 billion, just in time.
That means a doubling by 2025 is entirely possible in principle, which could make the stock an attractive buy for growth-seeking investors. Still, the risks of going short are quite significant. Ginkgo’s business model remains unvalidated because it is not profitable and no other competitor is using it. Similarly, the business will need to continue to add new customers (not to mention retain existing ones) at a steady pace to ensure that its revenue base continues to grow.
Of course, while none of that stopped Cathie Wood from investing, it probably should stop you if you don’t feel comfortable making a long shot in a cutting-edge business.
Alex Carchidi has no position in any of the mentioned stocks. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.