Ginkgo Bioworks is looking attractive, says Raymond James

A strong beat on the quarterly bottom line has helped Raymond James analyst Rahul Sarugaser stay positive on bioengineering company Ginkgo Bioworks (Ginkgo Bioworks Stock Quote, Chart, News NYSE:DNA), maintaining his “Outperform 2” rating and target price of $11.50/share in an update to clients on May 17.

Boston-based Ginkgo Bioworks Holdings builds bespoke living cells through the use of its Foundry + Codebase platform, where Foundry is the suite of physical infrastructure on which Ginkgo undertakes its cell programming work, while the Codebase is Ginkgo’s expanding catalogue of institutional biological knowledge it uses on to execute new projects.

Sarugaser’s updated analysis comes after Ginkgo released its first quarter financial results for 2022, which Sarugaser noted to have a big, albeit somewhat lumpy, beat on topline figures which in turn led to the bottom line beat, although his focus was catered more to the previously announced expansion to its platform capabilities in agricultural biologicals through a series of transactions with Bayer.

“As Bayer-Ginkgo consummate the transaction and identify broader areas of alignment, we could see the agreement materially adding to Ginkgo’s total project count, accelerating Ginkgo toward its target of approximately 500 new program additions in 2025,” Sarugaser said. “To this end, we could envision similar anchor partnerships in other sectors (e.g. bio-pharma, consumer goods, energy, etc.) as Ginkgo builds out deeper expertise and broader capabilities.”

Ginkgo’s financial quarter was headlined by $168.4 million in revenue to significantly outpace the Raymond James projection of $95.1 million and the consensus forecast of $105.7 million, while producing sequential growth of 13.8 per cent.

Though the company’s Foundry Revenue was a miss at $21.5 million (Raymond James estimate was $35.1 million), Ginkgo’s Biosecurity Revenue more than made up the difference, as its reported revenue of $133 million more than doubled the Raymond James projection of $60 million, though Sarugaser remained cautious on account of the Biosecurity revenue being largely derived from COVID-19 testing in schools, thereby bringing about an expectation of attenuation for the upcoming summer vacation.

“The fate of these pooled testing programs beyond their Jul. 2022 renewal dates remain uncertain, so there is some possibility that about 90 per cent of the revenue in this segment beyond 4Q22 could, essentially, expire,” Sarugaser said. “This said, we know that Ginkgo has actively been developing approaches to drive Biosecurity initiatives into the future, with passive wastewater and air monitoring as examples.”

Ginkgo’s adjusted EBITDA was also a significant source of optimism, with the $2 million loss coming in significantly ahead of the consensus forecast of a $26.8 million loss and the Raymond James estimate of a $31.4 million loss.

Meanwhile, the company has approximately $1.5 billion in cash available as of the end of the quarter, though net income was a significant miss at a loss of $590.7 million compared to the Raymond James projection of a $43.7 million, and slightly closer to the consensus projection of a $283.2 million loss. 

“We sometimes remark that the pace of change never seems to slow at Ginkgo, and the beginning of 2022 has been no exception,” said Jason Kelly, co-founder and CEO of Ginkgo in the company’s May 16 press release. “We added 11 new programs in our cell programming business in the first quarter of 2022, including in many novel areas of work, and realized record revenues in our biosecurity business.  We believe we are well positioned for this market downturn and expect to continue to invest in platform growth, both organically and through M&A, while ensuring we maintain a healthy balance sheet.”

Since the release of the quarter results, Ginkgo Bioworks has also entered into a non-binding Memorandum of Understanding with First Serv, a Qatari investment holding company, to develop and implement new biosecurity capabilities in Qatar, with the aim of establishing the Qatari capital of Doha as a critical node of a global pathogen monitoring network.

“Biosecurity in this new era is about applying the cutting edge tools of the biotech age to prevent the next pandemic or infectious disease threat. Proactive pathogen monitoring is an essential part of this effort—we need a robust global weather map to identify and track emerging biological threats,” said Matt McKnight, General Manager, Biosecurity of Ginkgo Bioworks on May 18. “We are incredibly excited by the opportunity to use our biosecurity platform to help bolster Qatar’s pathogen monitoring infrastructure to assist Doha’s global travel hub in becoming a leader in helping prepare the world for the next new variant or novel pathogen.” 

Sarugaser’s overall 2022 revenue projection of $381 million puts him squarely in the middle of the updated management guidance of between $375 million and $390 million for a potential year-over-year increase of 21.3 per cent, while his 2023 projection of $420 million suggests year-over-year growth of 10.2 per cent.

In terms of valuation, Sarugaser forecasts the EV/Revenue multiple to drop from the reported 18.9x in 2021 to a projected 15.6x in 2022, then to a projected 14.1x in 2023.

Meanwhile, with continued research and development for new programs, Sarugaser continues to forecast EBITDA losses, setting loss projections of $130 million and $142 million for 2022 and 2023, respectively.

Ginkgo’s stock momentum has ground to a halt with a 65.9 per cent loss since the start of 2022, starting the year trading at $8.69/share. However, the stock has gained a bit of momentum since hitting a 2022 low of $2.20/share on May 11. At the time of publication, Sarugaser’s retained $11.50 target represented a projected one-year return of 373.3 per cent.