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As most of my readers know, I’ve spent a lot of time following the moves of Cathie Wood and Ark Invest. The ETF firm saw tremendous asset growth in 2020 as many of its high growth names soared, only to fall back to earth since then. This week, Ginkgo Bioworks (NYSE:DNA), a name that Ark Invest has a sizable stake in between two of its funds, reported solid Q3 revenues and increased its yearly revenue forecast, only to follow up the quarterly report with a very unusual equity offering that sent shares tumbling.
On Monday after the bell, the company reported its Q3 results. Revenues for the period came in at $66 million, and while this top line number was down about 14.5% over the prior year period, the number beat street estimates by about $6 million. Most of the decline was on the Foundry side, due to Q3 2021 including downstream value share revenue related to an equity milestone achievement, and there were no large milestone payments in this year’s quarter. Biosecurity revenue came in at $42 million, down just $1 million over Q3 2021.
When we look at guidance, the forecast was a bit mixed. Ginkgo now expects to add 55-60 new Cell Programs to the Foundry platform in 2022, down from its previous forecast of 60 total. Partly as a result, the company lowered its Foundry revenue forecast for the year from a range of $165 to $180 million to now $150 million to $170 million. At the same time, Biosecurity guidance for the year has risen from at least $260 million at the Q2 report to at least $310 million, partly due to higher revenue from covid services, so the overall guide was above street estimates. The closing of the Zymergen deal sooner than expected could also help the overall revenue picture a little.
What’s really odd though here is that Ginkgo announced a $100 million equity offering after the closing bell on Tuesday. The first reason this news is curious is the stock is down about 80% over the last year, so the dilution here is a lot more than it would have been then. The outstanding share count has already surged this year thanks to multiple acquisitions as well as share-based compensation, which I’ll get back to in a bit. However, the real reason why this equity sale is so curious is that the company finished Q3 with over $1.3 billion in cash on the balance sheet. In fact, take a look at the following two statements from the Q3 earnings release:
CEO statement – “while our strong standalone cash balance of over $1.3 billion at the end of the third quarter continues to afford us substantial flexibility.”
Financial highlights section – “Cash and cash equivalents balance as of the end of the third quarter of over $1.3 billion puts Ginkgo in a strong financial position to pursue its strategic objectives.”
If the company’s financial position is so strong, why is it now raising money? The release talked about offsetting some of its Bayer deal proceeds, but that was only $80 million in cash. Management also talked on the conference call about the cash position being so strong, and how the Bayer collaboration revenue should mostly offset the added operating costs from that deal. It seems really odd to make a point about your financial position being so strong only to announce an equity offering a day later. As I always note, if the company itself is selling at current prices, why should investors buy here?
Earlier, I mentioned the issue of significant dilution with this name. As of March 17, 2022, there was a little over 1.08 billion shares of Class A common stock (which is the one that trades in the market), 391 million shares of Class B common stock, and 288,000,000 shares of non-voting Class C common stock outstanding. In the latest 10-Q filing this week, that non-voting class is down to 200 million shares. However, the number of Class A shares is up to more than 1.35 billion as of November 7th, with Class B still being more than 385 million. This equity deal could add at least another 35 million shares or so at current prices, and with no share repurchase program on the horizon, stock-based compensation will further dilute shareholders.
In the short run, one thing that could really impact the stock is what Cathie Wood and her team at Ark Invest decide to do. As of Monday, the ARK Innovation ETF (ARKK) owned over 89 million shares of Ginkgo, with the ARK Genomic Revolution ETF (ARKG) holding nearly 40 million. Not only is that a material amount of the company’s outstanding shares, but it is nearly 20% of the stock’s float according to Yahoo! Finance data. If Cathie Wood and her team decided to sell their entire position, it could provide a lot of downside pressure on a stock whose three-month average volume is only about 25 million shares. It’s also possible that the after-hours decline on Tuesday, if it holds, could mean more buying by Ark Invest.
In terms of valuation, wall street analysts are pretty positive on the name. Six of the nine analysts covering the name have either a Buy or Strong Buy rating on the stock, with the average price target of $6.86 representing more than 150% upside from Tuesday’s close. That figure may have to come down slightly to account for a little more dilution. The only negative here is that the street does see revenues dropping next year, mostly as a function of the uncertainty of covid testing driving Biosecurity revenue.
In the end, it has been a very strange couple of days for Ginkgo Bioworks. The company announced strong Q3 revenues on Monday and increased its yearly revenue forecast. Then, despite numerous statements in the earnings release and on the conference call about a strong cash position, management turned around Tuesday afternoon and filed to sell $100 million worth of stock. This is despite shares being close to their 52-week low, so the news sent shares down more than 7% in the after-hours session. If overall markets retrace some of their recent gains, or Cathie Wood and her team decide to start selling some of the ETF firm’s large position, this name could easily see a new low before the end of this year.
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