This article was originally published on May 22, 2022 and it has not been updated or revised, we’re just re-posting it to help answer the continuing wave of questions as Whitney Tilson continues to say that “there’s a good chance this stock just bottomed” and “an international conference recently took place in Amsterdam that focused on the breakthrough tech behind this stock, which could explode any day now.” The stock was around $4 when first teased, about a year ago, but is now well below $2, which is presumably why Tilson’s latest ads have been updated to call this the “$2 Inflation Stock,” not the “$4 Inflation Stock.”

Other than a few cheeky edits to replace “$4 Inflation Stock” with $2, what follows has not been updated since May of 2022… though, to be fair, the ad we’re writing about is also largely unchanged. The Quick Take above has my latest comments as of April 3. Enjoy…

5/31/22:

Several readers called my attention to a new ad from Whitney Tilson, who’s talking up an investment as a “$4 $2 Inflation Stock” by saying that if he had to invest his wife’s full retirement account in a single stock, this would be the one.

Which is an easy thing to say, of course, when that retirement account is not the only thing standing between you and a decade of eating cat food. Pundits often use the “if I had to go ‘all-in’ on one stock, this would be it!” — all while they know, of course, that they will never have to go “all in”, and that doing so with any stock would be taking a huge risk with the foundation of your future financial security.

So, to be clear, Tilson’s been around for a long time, ran a hedge fund for a while, and is doing very nicely with his Empire Financial Research business that he launched with Stansberry a couple years ago — he’s not a billionaire, but whether or not he blows his wife’s retirement account is unlikely to be hugely meaningful for his family. He has also made plenty of very public investing mistakes — he is more genuine than most in owning up to them, I mostly like the guy, but he’s not anywhere near infallible.

But still, we wanna know what that “secret” stock is, right?

It’s revealed in the special report, “The $4 Inflation Stock That Could Change Your Life,” which comes as a bonus when you subscribe to his Empire Stock Investor ($49, renews at $199). And he piles on the clues about this “secret” stock, so I’m sure the Thinkolator can get us a good answer for you — that way, you can think it over, maybe layer on a little skepticism, and decide later, once the hard sales pitch for the newsletter has worn off a little, whether you want to subscribe to read Whitney’s work, buy the stock, or pass on both.

(FYI, we learned from MarketWise (MKTW) that their paid-subscriber numbers are falling pretty hard to start this year, compared to Q1 of 2021, no real surprise as speculative interest in investing has clearly dropped from the manic highs of a year ago. MarketWise is the publicly-traded parent company for Stansberry, Tilson’s Empire, Brownstone, Casey Research, Palm Beach, Investorplace and others… so it was interesting to see that as paid subs are dropping off a bit, they also throw in a trial subscription to one of Lous Navellier’s Investorplace newsletters as a bonus inducement at the end of this Empire Stock Investor pitch… I wonder if we’ll see more of that marketing across their brands as numbers fall).

The pitch about “if I had to put it in one stock” is part of the lead-in — he says he did something similar with his wife’s retirement account in 1997, a couple years before he launched his hedge fund and mutual funds (both of which were closed years ago, after a bad run in the 2010s), in putting all of her retirement money ($20,000 at the time) into America Online stock, multiplying it sixfold as the dot-com mania unfolded. From Tilson’s ad:

“I see a similar situation unfolding right now with a small stock that went public in 2021.

“And it checks off every item on the list (just like AOL did).

“Demand for its services is off the charts, as the company’s revenue has recently quadrupled.

“Its management team is elite, including the former CEOs of MGM and Bayer, a highly regarded MIT scientist, and a billionaire businessman.

“They specialize in a revolutionary technology – one that could transform every industry on the planet.

“And they’re a market leader in an industry that’s projected to be worth $4 trillion in the coming years.”

Sounds intriguing, no? That’s actually probably enough of a group of hints to get our stock named for you… but we should hear a little bit of the pitch first, just to be sure. From the ad:

“… there’s a new industry on the rise.

“It’s likely one you’re not familiar with…

“But over the next few years, it’s expected to be worth $4 trillion.

“That’s more than the value of the global auto industry.

“And just like how Amazon and Netflix positioned themselves at the forefront of the tech revolution…

“The $4 stock I’m going to share with you today is making all the right moves to be at the forefront of this rapidly growing industry.”

He also goes on to call this a “Perfect 10 Stock,” and he shares his “perfect 10” criteria with us — apparently if you get nine of these you’re “perfect”, but if you get 10 you’re a “Perfect 10”. It seems Mr. Tilson, not unlike yours truly, might have spent too much time thinking about Bo Derek in the early 1980s.

Those criteria? This is how he lists them (I’m paraphrasing):

Capable of changing the way we live
Breakthrough products or services that will be used by billions around the world
Millions of dollars of future sales, not just projected but contractually guaranteed
Enough control over raw materials that supply chain crises will not stop production
Profit margins protected by patents or trade secrets
Very clear, single-minded mission
Completely legit and abide by SEBI guidelines
Trade on an American stock exchange
Excellent management team comprised of industry leaders

And the “perfect 10” one that many such companies don’t check off: He says it’s that the company is mostly unknown, that it “should fly silently under the radar.”

And that seems to be the key here, more from Tilson:

“… it might seem impossible that a stock which ticks all the above boxes is virtually unknown…

“But that’s the beauty of this particular stock.

“If I had to take a guess, I’d say only 1 in 40,000 people have even heard of it.

“It’s not surprising, since this company is 1/400th the size of Apple.”

Apple (AAPL) is at a market cap of about $2.4 trillion today, so that would put the market cap of this secret company somewhere in the $6 billion range. Prices have moved around dramatically, as you’ve probably noticed, so it’s probably not precisely there — but somewhere in that neighborhood.

What else appeals here:

“… just like AOL in 1997, there’s more to this company than its price tag (and small size) suggests.

“For one, it uses the most advanced technology on the planet.

“Two, it has multimillion-dollar contracts with some of the biggest companies in diverse industries.

“I’m talking about every industry from tech and beauty to pharma and beverage to energy and plastics.”

OK, some of you have already guessed at the answer… turns out, this is an idea that Tilson has pitched in the recent past, just a couple months ago, just with a different spiel. But we’re in too deep now, let’s hear a bit more…

“… the technology today’s stock represents has been silently bubbling under the surface for close to two decades now.

“The only reason it didn’t become mainstream was because it was too expensive.

“But over the past 20 years, as more companies, industries, and governments are beginning to use the technology…

“The economies of scale have started kicking in… and the price has plunged.

“In fact, the cost of programming the ‘chip’ on which this technology runs has fallen so dramatically, it now costs one ten- millionth of what it cost just 20 years ago.”

So that’s where he gets his “tipping point” argument here — costs have fallen so fast, just like they did with chip stocks a generation ago, that the growth will be explosive…

“Their deals will multiply exponentially…

“And the stock could explode.

“Right now, my research shows the stock is as big an opportunity as Amazon, Netflix, and Apple were before they exploded higher.”

OK, so it will only be as awesome a company as three of the most dominant consumer technology companies of the past two decades. No pressure there.

And as long as we’re still at it, let’s pick up the last bushelful of clues that Tilson drops for us:

“This company went public less than a year ago, and already massive deals are pouring in.

• A strategic merger with a Swiss multinational firm.
• A $100 million deal with a Fortune 500 German corporation.
• A $122 million deal with a Canadian company.
• A partnership with the government of Australia.
• A partnership with a $21 billion Japanese firm.
• And the company even received $1.1 billion from the U.S. government for a critical homeland security project.

“These are all incredible deals for a company that trades for less than $5.”

The “inflation fighter” aspect of this pitch is a little bit non-obvious — it’s essentially that this company will grow so fast that it will fight inflation that way, but he does also throw in a little tidbit about the company’s business model that hints at some inflation resistance:

“… most of the deals this company makes with its customers is that the deals are both fee- and royalty-based.

“Which means the company gets a lump sum of cash at the beginning of the deal…

“And once the deal is done… the money never stops coming.”

We’re a long ways from that becoming meaningful for this company, but yes, the “royalty” business model is one of the more compelling ways to protect against persistent inflation — that’s because, generally speaking, a royalty represents a share of the top-line revenue of a business, whether that’s the royalty a gold miner pays to Franco-Nevada or the royalty a McDonald’s franchise owner pays to the parent company, and that top-line revenue, at least in most businesses, will rise with inflation, without the parent company having to spend anything more to earn that revenue. It’s a great business model, period, but it’s likely to be especially appealing in inflationary times.

Like I said, though, we’re not really there yet — this business is still many years from that “royalty” part of the business having the potential to become a significant contributor.

So what is it? We’ll spare you the next dozen or so pages of hype, hints and selling that Tilson provides — this “$4 Inflation Stock” is, as you may have guessed by now, Ginkgo Bioworks (DNA), the same company Tilson also pitched as “America’s Next Big Monopoly” starting a few months ago.

What is Ginkgo? This is how they describe themselves:

“Ginkgo Bioworks is building a platform to enable customers to program cells as easily as we can program computers. Our cell programming platform enables the growth of biotechnology across diverse markets, from food to fragrance to pharmaceuticals. Ginkgo has also actively supported a number of COVID-19 response efforts, including community testing, epidemiological tracing, vaccine development and therapeutics discovery.”

What that means in practice is that they are building a cell-synthesis factory, beginning with the creation of genetically edited new cells and leading to a foundry that grows those programmed cells and can test and tinker with thousands of different customized strains, providing their customers, in the end, with the genetic building blocks that can generate bespoke ingredients for all kinds of products. Most of the stuff that is being developed in this first wave of synthetic biology seems to be flavorings, fragrances and other specialty chemicals, and the potential of the pharmaceutical market is obviously massive, but biology touches almost everything.

Ginkgo Bioworks is an ambitious company, but the size of the operating business is still fairly small compared to that ambition. Revenue is up 300% or so over the past year, but as of the last quarter was still on an annual pace of only $438 million, well below their operating costs — and as we’ve seen in recent months, investors can be fickle about putting a value on a money-losing company. Right now, with the shares down to about $3, the market cap is about $5 billion… a far cry from the $15-20 billion valuation this startup carried at times last year, though the business hasn’t really changed.

And that trailing $438 million in revenue is actually a misleading number, because the company is (probably) at the tail end of benefitting from a huge surge in their biosecurity business, which was quickly launched to help with COVID-19. That part of Ginkgo is called Concentric, and it enjoyed a real surge in revenue over the past few quarters, mostly from their work in COVID monitoring and testing, especially for schools, and that’s been widely seen as “likely to slow down.” It’s also not likely to ever be profitable in a meaningful way, since there’s not any real claim that Ginkgo does testing or disease monitoring any better than anyone else — that work seems mostly to be reactionary and, one hopes, largely humanitarian in its inspiration.

On the other hand, they do say that Concentric hac a gross margin of 42% in the first quarter, which is higher than I would have thought — they don’t say what the operating costs of that business are, but do say that they only lost $16 million on an “adjusted EBITDA” basis in the first quarter, if you ignore the stock-based compensation, so maybe it’s a better business than I think and is helping to cover a little over their overhread. I’ll remain cautious about that part of the business, it’s not what makes Gingko interesting, so all I’ll say about Concentric is that the experience of building this testing business may help the company scale a little faster in its core work, but that remains to be seen.

Their core “foundry” revenue, which comes from companies paying Ginkgo to develop new synthetic cells for their specific purposes, and then to eventually use their expertise to help them produce those cells in commercial quantities, is reported to be growing fairly steadily… but not steadily enough to smooth out the spike at Concentric. A year ago, when Ginkgo was just planning its SPAC merger, they expected $50 million in biosecurity revenue and $100 million in Foundry revenue in 2021… and the year ended with Concentric reporting $201 million in revenue and the Foundry business $113 million. Both are growing, but Concentric really overshadows the core business and provided all of the positive “surprise” last year.

The good news? With the first quarter update a couple weeks ago, they announced that they’re now expecting Concentric to be a little more robust this year than they had previously hoped — they raised the guidance for that segment, and kept their foundry guidance steady, so they now expect ~$383 million in revenue this year, which is more than 10% higher than their previous guidance.

And that’s mostly because Concentric blew away expectations in the first quarter, with $147 million in revenue in those three months. And that, again, overshadowed the fact that the Foundry business, the part we’re most interested in, actually shrank almost 10% from last year’s first quarter, and brought in only $21 million — they say that’s because they had more earlier-stage projects in the quarter, and none of the later-stage “royalty” type revenue, and that those things aren’t very predictable quarter-to-quarter, but the good news is that they continue to have new orders and new projects in the Foundry business. The story is that the Foundry is where the potential really lives for this to become a massive “platform” business, akin to Amazon Web Services or whatever other optimistic comparison you want to make, but it’s also, I should caution, VERY early days in that most interesting part of the business.

Still, with all the wild ups and downs, Ginkgo is maintaining the same expectation for 2022 Foundry revenue that they had a year ago — in the initial SPAC presentations in May of 2021, they were forecasting $175 million in Foundry revenue for 2022, and now their guidance is “$165-180 million.” So that’s still top-line growth in the core business of about 50%. And if you ignore the Concentric testing/COVID business, which I think we probably should, that means you’re valuing Ginkgo today at about 30X their expected 2022 Foundry revenue.

That’s a steep valuation, of course, even if it’s a lot lower than it was a few months ago. Which means that this might eventually be a compelling investment, if their ambitions bear fruit and they end up with tons of large contracts for their synthetic products at some point in the years to come, but it’s not likely to be a financially comfortable one in the near future. This is a startup, they are spending heavily and effectively trying to use their technologies and innovation to lead in a new industry.

Since the SPAC merger was announced, with a prospective valuation for the company of about $15 billion, the good news is that the business has grown faster than anticipated, largely because of the demand for Concentric’s testing work but also because of growth in the Foundry business (which grew 91% last year, after they had announced that they expected about 70% growth).

And while the income impact of their massive stock-based compensation has been dramatic, partly because a decade or more of stock awards vested upon the consummation of the SPAC merger, and that makes the company’s income statement look wildly unsupportable ($1.6 billion of costs from those stock awards last year, and there’s more to come as more awards are vested over the next year or so), the adjusted financials are not wildly out of line with what was expected — they guided to an “adjusted EBITDA” loss of $157 million for 2021 a year ago, and ended with an actual EBITDA loss of $106 million and negative operating cash flow of about $250 million. It’s not profitable, and their costs have risen a bit, but the top-line number that makes it look like Ginkgo is burning almost $2 billion a year is misleading.

The bad news is that optimism has waned considerably, about half of the SPAC shareholders redeemed their shares last Fall instead of taking the risk of remaining shareholders of the new company, and there have been no real “surprise” numbers or breakthrough products announced from the core Foundry business to get investors jazzed up and excited… and, of course, there isn’t a lot of story stock excitement out there in the market, period. Investor sentiment has turned rapidly against money-losing ideas, which makes Ginkgo a hard sell… even in the best of times, they were expecting to lose money until at least 2025, and even if they’re closely tracking with those forecasts it’s pretty clear that investors have very little trust in the future projections of last year’s newly-public SPAC companies (as is fair, most of them are likely to have been much too wildly optimistic in their rush to appeal to investors).

They also got a downgrade just after their last earnings announcement, from one of the analysts at Bank of America — here’s the summary of that from Briefing.com:

“Ginkgo Bioworks: Near-to-medium term upside appears limited; downgrade DNA to Underperform – BofA Securities; tgt $3
BofA Securitie’ Derik de Bruin states, ‘Our DCF-based PO moves to $3 (was $6) and we change our rating on DNA from Neutral to Underperform given limited upside. That said, we remain positive on the long-term potential of the synthetic biology industry and DNA’s platform. In order to revisit our thesis, we would look for the market’s appetite for longer duration growth stories to return and for greater visibility.'”

And finally, on the negative side of the ledger, Gingko also faced a very public “short attack” last fall, right around the time the SPAC merger was being finalized and they were hitting their most wildly optimistic valuation ($23 billion, at around $12 a share). That came from Scorpion Capital, which compared the “related-party schemes” of the company to the “China Hustle” that fueled so many Chinese scams a decade ago… here’s the headline of the report:

“A Snake Oil Salesman And Some Hedge Funds Partner Up To Pimp The Latest “Synthetic Biology” Scam — As Phantom Revenue, A Hocus-Pocus Business Model, Rampant Related-Party Games, And A Decade of Colossal Failure Get Shoveled Into Yet Another Garbage SPAC.”

So if you want to balance Tilson’s pitch about this being the next coming of Amazon, probably the Scorpion short report is the most aggressive counterpoint you’ll see — Ginkgo has said that they did an internal investigation following the short report, and did not find reason to restate any of their financial results to date, so that’s encouraging on the “accounting fraud” allegations part of the report, but they didn’t really respond to any of the specifics from Scorpion’s attack. They’re not obligated to respond, of course, and Scorpion is likewise not obligated to be fair or balanced in their analysis, since they’re trying to profit from the share price falling… but being fair doesn’t mean you meet in the middle, it means you review the evidence and you make a reasonable conclusion about how much risk you’re willing to take.

Personally, I’m a little worried about the accounting and the fact that it might be masking a weak business — to some degree we have to take them at their word, that they’re not, as Scorpion alleges, simply investing in startups who they hope can become customers and round-tripping that investment in the form of “credits” for Foundry work that they can call “revenue,” even without cash coming in the door (Scorpion goes farther than that, of course, alleging that those partner companies aren’t really startups at all, they’re just parts of Ginkgo that are being treated as separate in order to generate revenue in a shell game).

I have no great insight other than that — it’s really still a startup, albeit a well-funded and very promotional one… to some extent, we’re not going to know if it works until after the fact. I’m not particularly worried about the more aggressive parts of the short attack, alleging that this is all an elaborate scam, including quotes from employees, because I’ve seen plenty of wildly exaggerated short reports that use similar storytelling. That doesn’t mean they’re wrong, but it does mean I’d be skeptical of both the aggressive longs and the aggressive shorts.

Yes, Ginkgo was absurd at a $20 billion valuation. Maybe it’s more reasonable at $5 billion.

And yes, some of Ginkgo’s large investors are also seeding Ginkgo customers, maybe at the behest of Ginkgo. Maybe that’s because they’re trying to prop up Ginkgo at a time when the organic demand for their products is disappointing, or maybe it’s because they see huge growth in the synthetic biology business and want to be major players.

There’s more than one way to look at this, for sure, but, no matter what conclusion you come to, it’s a speculation.

If you want a somewhat more balanced story than the Scorpion short attack, there was a piece in MIT Technology Review last summer that also got some attention, and also goes into some of the criticism of management overpromising and the “circular revenue” of Ginkgo’s partners and spinouts, “Is Ginkgo’s synthetic-biology story worth $15 billion?” Here’s a little excerpt, to give you the flavor of that piece:

“The Boston genetic engineering company Ginkgo Bioworks and its CEO, Jason Kelly, have been spectacularly successful selling a story: that synthetic biology will transform the manufacture of physical products. What computers did for information, Kelly says, biology will do for the physical world. Instead of making a chemical from petroleum, why not have Ginkgo’s multi-floor “foundry” in Boston’s seaport design a yeast cell to manufacture it instead from a broth of sugar water? ….

“Given Kelly’s spiel, it is surprising that 13 years after it was founded, Ginkgo can’t name a single significant product that is manufactured and sold using its organisms. To the company’s fans, that’s no problem. They say Ginkgo embodies the biggest trends in DNA science and surely will become the Intel, Microsoft, or Amazon of biology. Kelly has compared Ginkgo to all three. To skeptics, however, Ginkgo is a company with modest scientific achievements and little revenue, and its greatest talents lie in winning glowing press coverage and raising money.”

So… does that mean this company is on the leading edge of commercializing real industrial scale synthetic bio, developing new products that change the world and as they reach the tipping point, putting their $1.5 billion or so in cash to work at pushing the business to invent life-changing new ingredients or fuels or fabrics or whatever else? Is this a second coming of Tesla, where self-promotion to raise capital and not-quite-lies from Elon Musk in the service of a grander vision actually worked out? Or is it Theranos, where “fake it ’til you make it” faced the ultimate undoing? Maybe something a lot more boring than either of those? I don’t really know.

I put on a little options speculation in Ginkgo earlier this year, when it was heating up as the focus of a bunch of different newsletters who found the falling share price and early potential compelling… that obviously hasn’t worked out, the stock has continued to fall in recent months, but at this point the warrants and options speculations are probably not terribly compelling — not with the shares so low that the leverage you get is fairly limited.

And I’ve also continued to look into the company over the past few months, as it continues to be heavily touted — investors are trying to find the babies that have been thrown out with the bathwater as SPAC mania collapses, and perhaps trying to find footholds in climbing this “synthetic bio will be the next big sector” mountain (choose your own metaphor, we’ve got dozens!)

I may be more trusting in the company than most, since I’ve been reading about it as a local startup here in Massachusetts for a decade or so and appreciate the extent to which overpromising and salesmanship is a big part of building interest in a new industry, so I’m occasionally tempted to buy a few shares… but it does seem, even at this lower valuation, to be wildly speculative, with a great pitch and a smart business model but very little in the way of real results yet (what would stand out for me would be major headline products or accelerating revenue).

I haven’t bought as of yet, though I did find their deal last month to effectively take over a big Bayer facility and team to be an interesting step, possibly helping them to build a larger business in agriculture. My guess is that if the company does end up building a real business, supporting a path to profitability on some reasonable trajectory, it will take a while… this is not an easy sector to disrupt or grow fast, clearly, at least not as fast and easy as software. They are not making any fantastically shocking headway just yet, and I’m guessing I’ll probably have time to buy it later if I choose, perhaps at a higher price but with a clearer vision of the future.

I wouldn’t assume that Ginkgo is on the way to a complete implosion and destruction of the business, like we saw with fellow synbio hopeful Zymergen (ZY) last year, but neither would I think about putting it in my retirement account… let alone putting all of my wife’s account into this stock. This is still early-days speculation in a company that might not make it, and, not to reveal too much about my financial situation, but I really need my retirement account to not go to zero. And I would also very much like to stay married.

I don’t think Whitney Tilson is an idiot, and he’s an experienced short seller so he’s obviously well aware of the Scorpion short report and the negative side of the Ginkgo argument, and he’s still doubling down here after recommending it earlier in the year — maybe he’s right, but I’m not ready to join him.

I hope Ginkgo makes it, it’s a cool story… but if they become the next Amazon, it’s not going to be next year, and even Amazon had several 70% downdrafts, and one near-99% collapse, after it became a household name. If there’s anything the past year has told us, it’s that it’s OK to move slow and think carefully, even if you’re convinced that this will be a world-changing company a decade from now.

That’s where I land with Ginkgo, at least — a cool story that’s not ready for prime time just yet, but I did put on that options speculation when it looked like interest might be building (I was wrong, at least so far), and it’s looking a little more reasonable as the price falls.

That’s just my take, and what I’m doing with my money — when it comes to your retirement account, of course, you get to make the call: Ready to bet your spouse’s retirement account on Gingko Bioworks? Maybe worth a little speculative punt? Think it’s trash dressed up in a glossy website? Let us know with a comment below… and thanks, as always, for reading.

P.S. We haven’t heard recently from many Empire subscribers, and it’s been a couple years now since they started publishing, so if you’ve ever tried out Empire Stock Investor please click here to pop over to our Reviews page and let your fellow investors now what you think. Thanks!

Disclosure: of the companies mentioned above, I own call options on Ginkgo Bioworks and shares of Amazon. I will not trade in any covered investment for at least three days after publication, per Stock Gumshoe’s trading rules.