This teaser pitch seems to have started running back in February, though it didn’t catch my attention at the time — as I go back through my inbox, I see it was initially pitched with the headline, “The Everything Chip” and touted for its 400 million “patents,” but the latest version that caught my eye, and which has generated a lot of questions from readers this week, was a push for this secret stock as “America’s Next Big Monopoly.” The ad is selling subscriptions to Tilson’s Empire Stock Investor ($49 intro price, renews at $199).

And thanks to the collapse in the markets, I’m guessing we haven’t missed much — if the ad started back in February (it carries a “January 2022” date at the bottom, my earliest copy is from February 1), then whatever stock Whitney Tilson is teasing this time is probably cheaper than it was when he put the presentation together. So let’s dig in… here’s part of the promo email that caught my eye:

“Which of these two is you?

“a) You invested in Amazon, Apple, Google, or Netflix early on before they became stock market favorites

“b) You missed out on some of the biggest gains of the past two decades

“If you’re in the first group, you know exactly what to do with this opportunity.

“If you’re in the second group, don’t worry! You now have the opportunity to invest in a company that has the potential to become ‘America’s Next Big Monopoly.'”

That strikes a nerve with most investors, of course, we’ve all got the stories of “the one that got away” — I did buy Google right after the IPO and have kept buying for 17 years now, so that’s my saving grace, but I waited until five years ago to buy Amazon for the first time, I sold Apple too early, and I’ve never owned Netflix. There’s always room for some regret.

And he drops a couple other clues in that email as well…

“Forbes says this company could be the next Apple or Microsoft…

“Barron’s says this could be the ‘next big thing.’

“Bill Gates has already invested millions into this company. And so has tech investor Cathie Wood.”

And, of course, the urgency…

“The shares of this company are trading for less than $10 right now. But I don’t think they’ll stay this cheap for long once this story leaks. Click here for the details.”

So… what’s the stock? As is typical, once you click through you face a long “presentation” sales pitch from Whitney Tilson, and it ends up including three stocks — one “freebie” that he gives away to keep you listening, then the main “top secret” pick that he’s calling “America’s Next Big Monopoly,” and then, to sweeten the pot a little, another investment that he teases as “California’s Longest-Running Monopoly.”

The first one? In case you didn’t have the patience to sit through the “presentation,” the freebie he calls “Investment #1” is CRISPR Therapeutics (CRSP) — here’s what he says about that one:

“CRISPR is now ready for its next growth phase. That’s why my team and I rate CRISPR (CRSP) shares a “buy” up to $120.

“But as bullish as we are on CRISPR, if you’re looking to 5X or even 10X your money… then you’ll want to invest in the company I believe will be America’s next big monopoly.”

CRISPR has had a little bit of a rough year, including another loss in the ongoing patent battle over CRISPR-cas9 gene editing technology, but it’s still actually relatively close to where it was trading in February when I first started seeing these ads, and it’s WAY below $120 (as of today, it’s right around $65). I’ve not invested in any of the three or four “foundational” CRISPR companies, all of which are both trying to defend some basic patents in the space and to develop new iterations of the technology and partner with pharmaceutical companies to develop drugs based on their gene editing techniques — it is obviously potentially huge, the idea of “owning” the main technique by which genes are edited or partnering on massive pharmaceutical breakthroughs that enable genetic diseases to be eradicated, but I’ve never been able to figure out the economic potential in these early years, mostly because the actual drugs and approved patient therapies aren’t yet ready for commercialization. The ones I always see mentioned are CRISPR Therapeutics (CRSP), Editas (EDIT), Intellia Therapeutics (NTLA) and Caribou Biosciences (CRBU)… and I don’t own any of them, but if I were to invest in this specific CRISPR space I’d be inclined to just buy the basket of all four and ignore then for ten years to see if anything came of it.

But then we get to the “secret” stuff, what’s that “America’s Next Big Monopoly” stock that Tilson slots in as “Investment #2?”

A few more clues on that one for you….

“Synthetic biology designers view the living world as one that can be precisely tweaked to make life better.

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“And some of the best synthetic biology designers are working at “America’s Next big monopoly”.

“What Tesla and SpaceX are to mechanical engineers… this company is to synthetic biology engineers.

“This firm has already partnered with many of the leading companies that are embracing synthetic biology, including Moderna, Roche, and Bayer.”

That’s starting to sound awfully familiar already — we’ve covered quite a few “synthetic biology” pitches in recent months. What other clues do we get about this specific stock?

Tilson’s making it pretty easy this time, he includes some “endorsement” quotes from several different big-name publications to buttress his argument, and that also gives us some good leads…

“Could this be the next Apple or Microsoft? How this Little-known $15 billion company is coding life and bringing DNA into the digital age.” (Forbes)

“The highest-profile company in the hot area of synthetic biology and the NEXT BIG THING in a niche investment category” (Barron’s)

So that’s probably enough to get a high-confidence answer from the Thinkolator, but let’s grab a few more clues from Tilson’s pitch to make sure…

“This business model is very much like Amazon Web Services, or Apple’s App Store.

“But instead of supplying custom software solutions (Amazon Web Services) and applications (Apple Inc.), they supply custom genomes in the form of code.

“These unique genomes are being produced in a massive 219,000-square-foot laboratory in a regular-looking office building in Boston….

“… this company has the largest library of quaternary codes in the world, which they call codebase.

“The code base has over 3.4 billion codes. And it keeps adding more every day.

“Think of it as the Google of quaternary codes.

“But while Google’s information is free, ‘America’s next big monopoly’ charges big money for these codes. And it’s already licensing them out to multi-billion-dollar companies like Bayer, Cronos, Roche, and more.”

And he goes into some more detail on what he meant by that hint about 400 “patents”….

“Out of its 3.4 billion gene sequences, over 400 million are proprietary.

“That’s like having 400 million ‘patents.’ Only better.

“Because unlike regular patents, these never expire… so the competition will never be able to figure out their secrets.

:Once it signs a contract with a customer, the client gets a bill for the work done in the foundry in Boston, similar to how Amazon charges its customers for using its AWS data centers.

“When a customer’s cell goes to market, this company will receive either a royalty or an equity. It’s sort of like Apple’s App Store… only much, much bigger.”

So… hoodat? Thinkolator sez that Whitney Tilson is teasing Ginkgo Bioworks (DNA), the synthetic biology company that I first wrote about just last week, for a Luke Lango pitch that was calling this business “G.C.T.”

The clues match perfectly, so no surprises there — the stock is well below $10, it was around $5-6 when the teaser ad first started running, and has now dropped to about $3.50… they have leased a new 219,000 square foot lab space in the Seaport district in Boston, among several other commitments they have to expand their footprint here in Massachusetts as they boost their production capacity… it was a $15 billion company as they were planning their SPAC merger last year, and actually reached about $21 billion at the peak in November, though now has an enterprise value of a little less than $5 billion… and “more than 3.4 billion” is the number they’ve thrown around for their library of gene sequences.

I did decide to speculate on some Ginkgo Bioworks call options as the shares were falling last week, though that’s been a mistake at least in the short term, as the stock has fallen another 25% or so.

The basic financials still highlight that this is very much a “future” idea, not a “the numbers make sense now” idea – and they’re clouded by the fact that they had a big surge in COVID-related revenue (they have a biosecurity division that does a lot of testing work, which is slowing down markedly now). They’re currently valued at about 35X what they think their core “Foundry” revenue will be in 2022, that’s the real synthetic biology work they do, and the reason to own the stock, but if you include the COVID testing work the reported numbers for 2021 look better than that, so you’ll see that overall, the company is valued at about 18X sales now. COVID testing/biosecurity generated about 2/3 of revenue in 2021 and will likely be about half of 2022 revenues as that business slows down.

If you want to be optimistic, then you can look at just the Foundry revenue and see them growing at 91% (expected) this year, with the possibility for margins to improve in a few years as royalties and/or equity stakes in their customers’ programs begin to build… if you want to be pessimistic, then you’re paying almost 20X revenues for a company that loses tons of money and will probably only grow by 5-10% on the top line this year, and given the likely gradual erosion of he COVID testing business that top-line growth might not look very exciting for at least another year or two.

Here’s part of what I wrote last week, in case you missed it:

The appeal with Ginkgo is that they have some meaningful scalability if their synthetic compounds go into much wider use — their core revenue now is primarily from “Foundry” work, they’re essentially paid to do the R&D to develop a new cell for a particular purpose, and to test and perfect that molecule to match the customer’s needs and begin to produce it in volume over a few years (they’re getting to the point where their customers are close to covering 100% of the R&D cost up front, which is key), but then there’s the potential for much higher-margin revenues several years out into the future as their synthetic cells become important ingredients in commercially viable products — they structure their programs to generate either a share of equity ownership or a stream of royalties, so that pool of equity and of potential future royalties keeps growing as more programs work their way through development (the two outcomes are roughly equivalent, in terms of how much cash Ginkgo gets — though with equity they get it faster, with royalties it comes in slower).

Ginkgo still represents a lot of uncertainty, given how early it is in this industry and how much money they’re still losing, and I don’t have any expertise about whether competitive platforms or breakthroughs in synthetic biology will emerge over the coming years to make their technology irrelevant, so one would have to go in with that mindset which we should probably have with all emerging technology companies: It might not work at all. There might be something much better that comes along before (or after) Ginkgo becomes a cash-generating business (which might happen in a few years, if they work to plan, or might not happen at all). The comparisons to Microsoft and other technology platform companies have some merit, but as human beings we tend to latch on to the winners — and there have also been hundreds of failed computing platforms that are now lost to the sands of time, failed competitors to Microsoft (and Google, Apple, etc.)

The nice thing about platform companies? If you get it right, and they become a leader of a big industry in ten or twenty years, the rewards can be ridiculous. That’s where some of those daydream stories come from, the $1,000 you put into Microsoft when you got your tax refund in 1994 that became $90,000 27 years later… yes, we call that financial pornography for a reason, it distracts you from reality and it’s not likely to be attainable in the real world, but, at least with some portion of your portfolio, it’s OK to daydream.

So that makes this the fun kind of (relatively) small stock to speculate on — huge potential, really interesting story and founders who genuinely pioneered some technology breakthroughs, with a pretty clear focus on commercial advancement that is beginning to work, albeit not fully proven yet… and if it works out really well they could conceivably grow 100X in size. As long as you’re only risking 1X, that’s not such a bad deal — you just have to make sure to only speculate on these kinds of stocks with money that you can be very patient with, even if it looks, a few years down the road, like you’re in danger of losing 100% of your money.

Other readers called attention to the short report that the activist short investor Scorpion Capital did on Ginkgo around the time of the SPAC merger last year, calling it “a hoax for the ages,” largely because of the fact that a good portion of Ginkgo’s revenue comes from payments made by related parties for Foundry work, much of which was in turn paid for by Ginkgo’s seed funding for those “customer” companies, so I should mention that — you can read the short report here if you like.

Ginkgo responded to the short report with an internal investigation, probably at least in part because the Department of Justice made inquiries in the wake of the short report, and their own investigation concluded, not surprisingly, that “any suggestion of fraud, reporting violations, accounting errors, or other wrongdoing contained in the short seller’s report were unfounded and that no restatement of Ginkgo’s financials was needed.”

Personally, I’d worry more about the fragility of Ginkgo’s business in these early days than about actual fraud — it’s not necessarily fraudulent to invest in your customers in the hopes that they will become bigger customers, in some ways it’s like Coca Cola giving you a soda fountain in hopes that you’ll buy more syrup, but it’s true that Ginkgo didn’t really emphasize the fact that they’ve been actively involved in seeding the companies who they hope will become their keystone customers. Whether that’s a step in the maturation process as we wait for those customers to grow (some of them also have meaningful funding from other investors, they might fail but they’re not just shell companies made up out of thin air), or for more of Ginkgo’s work to (hopefully) be scaled by larger customers in the future, or a fraud that means they’re just manufacturing revenue that they know is temporary and will forever fail to grow as hoped, you’ll have to make the call. I’m comfortable speculating on this one with a small stake or, as I did, with a call option position while I think it over, but, as with so many emerging technologies, it’s definitely a high risk speculation today. The business model makes sense, the field is promising, they’ve got enough cash to keep seeding their growth prospects for a while yet, but the business is far from being profitable or self-sustaining at this point.

And if you like Tilson’s argument, well, the bonus is that you get to pay $3.50 for the shares that he apparently liked at $6.50… so that cuts your risk almost in half 🙂 (Just kidding — if you invest $1,000 in Ginkgo today, your risk is exactly the same as it would have been in February: You’re taking the risk that you might lose 100% of $1,000).

What’s your call, dear friends — think Ginkgo will be the leader as it builds the bio-factory of the future, enabling everything from DNA-based data storage to custom-engineered cells to make drugs and foods better and safer? Agree with Scorpion Capital that it’s all a fraud and will never amount to anything? Something inbetween? let us know with a comment below.

But wait, there’s more!

I mentioned that Tilson touted three stocks — the freebie CRSP, this secret “monopoly” stock that we’ve determined is Ginkgo Bioworks, and… rounding out the offering is another monopoly, here’s how Tilson teases it:

“When it comes to California and near monopolies, one automatically thinks of Silicon Valley and companies like Apple, Intel, Google, Netflix, and Facebook.

“But the company my team has zeroed in on has little to do with software.

“That said… software companies in California depend heavily on it.

“Without this monopoly, 16 million Californians will not be able to access the services of Apple, Intel, Google, Netflix, Facebook, or any of the thousands of software companies that keep popping up in the golden state.

“Simply put, this company has over half the state in its vice-like grip.”

We also get a few other clues — Tilson says they have a new CEO, who is quoted as saying that “We will lead with the best people and the newest technologies”… which I must admit, sounds like a generic quote from pretty much any CEO. And that CEO also says, we’re told, that “We have the best practices, the best functions, the best contracts, the best pricing.”

What else do we get beyond the generic CEO-speak? They do have some kind of deal going with Tesla…

“… the company has partnered with Tesla to set up a project that is the largest of its kind in the world.

“This $250 million project will help confirm the company’s position as a leader in its field and even expand its operations.

“Once this project is complete in around three months, I wouldn’t be surprised if this stock took off. I see potential gains of as much as 500% in the coming years.”

So who is this California monopoly? Well, no surprise, it’s one of the true “natural” monopolies, a utility company — Tilson is teasing PG&E Corp (PCG), owner of Pacific Gas and Electric, the regulated utility company that was sued into submission after accusations of lax powerline maintenance, mostly because investigators blamed some of California’s horrific wildfires on those electric lines.

And yes, the software companies of Silicon Valley certainly need electricity to do their work… and they mostly buy it from Pacific Gas & Electric, which is the largest utility provider in the northern half of the state.

The recent history has been not so great for PCG, of course — they filed for bankruptcy in early 2019, as claims coming from the wildfires threatened to swamp the company, and emerged from bankruptcy in mid-2020 with somewhat of a clean slate, including a large shareholding by a Fire Victims Trust that will administer future claims coming out of those wildfires, and with some new protections put in place by the California Legislature that lets PCG, along withe other regulated utilities in the state, join in a collective insurance fund of sorts to mitigate the financial fallout of any future wildfires. I have no idea how that’s going to work out, nor do I know what the next wildfire season might bring in Northern California, but the utility is at least set up to survive now, and to continue supplying electricity and natural gas to their business and residential customers… though as you’ve probably heard mention of in the news, that also means more blackouts as they tune their system to more quickly cut power in areas where fire risk is elevated.

As a business, they reported adjusted (non-GAAP) “core EPS” of $1 in 2021, so they believe they’ve righted the ship to some degree — they’re also spending heavily, including plans to put hundreds of miles of transmission lines underground to reduce fire risks, but they do have a huge rate-paying base of customers to help absorb those capital costs over time. The company’s goal is to begin paying a dividend when that is allowed (not before 2023 or 2024, I don’t think, given the bankruptcy settlement agreements), and to grow that dividend and their core earnings by 10% a year, as demand for electricity increases by 9% a year, fueled in part by electric vehicle adoption.

That would make PCG an unusually inexpensive utility stock, since that would give them a (adjusted) PE ratio of about 12, and utilities often trade at twice that valuation these days (the XLU ETF, for example, reports an average forward PE of 26 across its constituents — that ETF owns most of the large utilities, including NextEra (NEE), Duke Energy (DUK), Southern (SO) and Dominion Energy (D))… but it’s also true that utilities carry a lot of debt, so they tend to be interest-rate sensitive, and they also are primarily bought by investors because of their steady dividend yield, protected by regulatory monopoly and the right to negotiate with regulators to raise rates when their costs rise, but PCG doesn’t yet pay a dividend, which makes it harder to attract traditional utility investors.

Which all adds up to: PCG is pretty cheaply valued coming out of bankruptcy, though it’s also still quite hated thanks to their wildfire problems, and it doesn’t have a natural investor base because they don’t pay dividends yet, so I don’t know whether we should expect that valuation gap to be closed in the near future. And utility stocks in general have benefitted from a “flight to safety” trade in the past couple months, so they are currently about as richly valued as at any time in my memory — so although PCG has almost kept up with the utility sector in the post-Ukraine surge, the valuation gap could as easily be closed by most utilities falling as it could by PCG rising.

If we put this in the books as a Tilson pick on February 1, the first day I saw the ad, the stock is trading at almost exactly the same price today, roughly $12.50, lagging behind the 12% return from the XLU during those couple months.

If you’re interested in something a little more complicated, which does have a potential yield and share most of the upside potential of PCG, PCG also sold some “Equity Units” coming out of bankruptcy — those trade at ticker PCGU, they were sold at $100 and are convertible into common stock in 2023 at a variable rate (between 8.5929 shares, if the stock stays above $11.64, and 10.5263 shares, if the stock falls below $9.50), and according to the press releases at the time it looks like they pay 5.5% interest on the $100 principal in the interim, so it’s sort of like a convertible bond. Right now, PCGU looks pretty fairly priced — you should get something between $5-8 in income between now and maturity in mid-2023, depending on when those quarterly payments are timed, and the current value of PCG means the conversion would be worth about $107 today, so PCGU is priced pretty close to that combined value at about $114. Not a lot of surprise upside from that, compared to the shares, but sometimes people like to dabble in more complicated stuff, so maybe it’ll give you something to talk about on the golf course. The details are summed up by QuantumOnline, which I still think is the best source of info for preferred and convertible stocks and odd income-focused equities.

And that’s about it, friends — like either of those monopolies for your account? Other questions or comments? Use our friendly little comment box below to chime in as you like… and thanks for reading!

Disclosure: Of the investments mentioned above, I own shares of and/or call options on Google parent Alphabet, Amazon, the Utilities Select Sector SPDR, and Ginkgo Bioworks. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.