Buy Ginkgo Bioworks before the market catches up, says Raymond James

Raymond James analyst Rahul Sarugaser is elevating his hopes on biotech company Ginkgo Bioworks (Ginkgo Bioworks Stock Quote, Charts, News, Analysts, Financials NYSE:DNA), saying the company impressed in its latest quarter. In an update to clients on Tuesday, Sarugaser retained his “Outperform 2” rating while raising his target price from $11.50 to $14.50, saying the market is finally catching up with Ginkgo’s cell programming’s real potential.

Boston-based Ginkgo reported second quarter 2022 results on Monday, coming in with $144.6 million in total revenue compared to $43.6 million for the same period a year earlier. The company’s net loss was $670.6 million versus $54.5 million a year earlier or negative $0.41 per share versus negative $0.04 per share in Q2 2021. (All figures in US dollars.)

Ginkgo designs and builds living cells via biosynthesis which allows for custom-made cell production for industries such as food, agriculture, materials and pharmaceuticals. Breaking down the Q2, Ginkgo had revenue of $44.2 million from its Foundry platform, up 105 per cent year-over-year, and Biosecurity revenue of $3.9 million in the Product segment and $96.5 million in Services.

Ginkgo said it added 13 new Cell Programs to Foundry over the quarter, while Concentric, Ginkgo’s biosecurity program, was awarded the contract to continue the US Centers for Disease Control’s traveler-based SARS-CoV-2 genomic surveillance program. More recently, Ginkgo announced in July an agreement to acquire biotech company Zymergen and announced a new partnership with pharma heavyweight Bayer representing the company’s largest cell programming contract to date.

“We delivered a strong quarter across both our cell programming and biosecurity businesses,” said Jason Kelly, Ginkgo co-founder and CEO of Ginkgo, in a press release. “We added 13 new Cell Programs and more than doubled our second-quarter Foundry revenue year-over-year.”

With its quarterly announcement, Ginkgo raised its full 2022 revenue guidance from $375-$390 million to $425-$440 million while management expects to add 60 new cell programs to Foundry this year.

“We executed well on our biosecurity business through the remainder of the school year and are seeing traction across this business with longer-term, diversified biosecurity opportunities, including being awarded a new contract from the CDC to continue our pathogen monitoring work in airports. We are excited about our recently announced transactions with Zymergen and Bayer, which we expect to significantly improve our platform and drive future value,” Kelly said.

The second quarter results were ahead of Ginkgo’s own forecast as well as beating analysts’ expectations by a long shot. As reported by Sarugaser, DNA’s $144.6 million topline was above the consensus call of $77.6 million and the Raymond James forecast of $63.8 million. The biggest surprise was with Biosecurity, whose $100.4 million revenue was way above Sarugaser’s $21.0 million call. On earnings, Sarugaser said DNA’s Q2 adjusted EBITDA loss of $23.5 million was better than the Street’s $48.3 million as well as Raymond James’ $57.1 million.

As Ginkgo’s fourth publicly-reported quarter, Sarugaser said the company has been consistent in meeting and beating all guidance so far it has set. 

“While we appreciate the many accomplishments during 2Q22 and early 3Q22 — of note, its transformative ag-bio partnership/facility transaction with Bayer (MOU stage, moved to definitive agreement stage July 2022), its multi-program pharma partnership with Novo Nordisk, its acquisition of Zymergen in July 2022, its (up to) $61 million biosecurity deal with the U.S. CDC — we see great significance in DNA adding 13 sector-diversified new programs this quarter, bolstering our confidence that DNA should meet its target of 60 new programs added this year,” Sarugaser wrote.

“This motivates us to further reduce our discount (i.e. increase our estimate) on DNA’s 2025 target of 500 programs to 430 (from 350), which lifts our rNPV analysis of equity + royalties from $21.7 billion to $26.4 billion, yielding our target price of $14.50. With DNA’s continued outperformance, the Street is beginning to see that this cell programming thing is real,” he said.

Looking ahead, Sarugaser is calling for Ginkgo to deliver full 2022 revenue and EBITDA of $442 million (previously $381 million) and negative $228 million (previously negative $160 million), respectively, and 2023 revenue and EBITDA of $393 million (previously $422 million) and negative $375 million (previously $179 million), respectively.

On valuation, the analyst is projecting DNA to go from 15.3x in 2021’s EV/Revenue to 10.8x in 2022 to 12.2x in 2023. On EV/EBITDA, he expects the company’s multiple to go from 45.1x in 2021 to negative 21.0x in 2022 to negative 12.8x in 2023.

At the time of publication of Sarugaser’s report, the analyst’s new $14.50 target represented a projected one-year return of 315 per cent. Currently, Ginkgo’s share price is up about 25 per cent over the past three months but is down about 59 per cent year-to-date.