If a stock is down more than 90% during the past year, you know there's something seriously wrong with the underlying business. Things have gotten so bad for biotech company Ginkgo Bioworks Holdings (DNA 4.03%) that it recently had to do a 1-for-40 reverse stock split to keep its share price up and stay listed on the New York Stock Exchange. It has been in the midst of a stunning free fall as investors appear to have lost patience with the business.
Is the sell-off justifiable, or is this just an overreaction from investors? Let's take a look at why the stock is struggling so much and if there's any reason for investors to consider taking a chance on Ginkgo today.
Ginkgo's losses and cash burn continue to mount
There is a lot of potential in the long run for Ginkgo to help companies develop next-gen, bioengineered products. One of the more exciting opportunities for the business is working to analyze biological data with the help of artificial intelligence (AI) to bring products to market more efficiently. But for all the deals and partnerships that Ginkgo has announced in recent years, including working with big names such as Alphabet, Merck, and Novo Nordisk, the results have simply been underwhelming. Ginkgo has continually posted losses, and its cash burn has been significant.
DNA Net Income (Quarterly) data by YCharts
Ginkgo also isn't proving to be much of a growth investment. Through the first half of the year, the company's sales have totaled $94.2 million, down 42% from the same period last year. The company says it has experienced a significant decline in COVID-19 testing, which provided its top line with a big boost in previous years. But with so many deals and agreements, investors should have arguably expected a lot more growth by now to help offset those declines.
As of the end of June, Ginkgo had $730.4 million in cash and cash equivalents on its books. The problem is that between its operating activities and investing activities, the company used up more than $212 million during the past six months. If that doesn't improve drastically, the company may need to raise cash through debt or a stock offering, which could result in more bearishness and put even greater downward pressure on an already struggling stock.
High short interest suggests there could be wild swings ahead
There are many short-sellers betting against Ginkgo right now. While short interest is lower than it was this time last year, it's still significant at more than 12% of the stock's float.
DNA Percent of Float Short data by YCharts
Whenever there's a high short interest, that's a sign to investors that the stock's movements could be sudden and significant. If Ginkgo does well and proves its doubters wrong, there could be a short squeeze that sends the stock soaring. On the flip side, however, if it does poorly, short-sellers may end up taking on larger short positions, feeling confident that they will be right and that the stock will fall further.
Should you take a chance on Ginkgo's stock?
Ginkgo isn't a stock I would suggest putting in your portfolio today. It's too hard to tell whether the company is indeed on the right path. Its financials are problematic, and at this point, it would be difficult to see a reason why things might be better for the stock in a year or two. I could, in fact, see things getting worse if the company's cash burn remains high and Ginkgo opts to issue shares to raise cash, which would dilute existing shareholders.
This is a high-risk healthcare stock that wouldn't be suitable for the vast majority of investors. Without stronger financials and proof that its operations are sustainable, investors are better off staying away from Ginkgo for the foreseeable future.
