Is Ginkgo Bioworks a synthetic biology pioneer or a scam?
This is the big question that investors have been trying to answer since Scorpion Capital earlier this month fired off a scathing 175-page report that sent the company’s newly public shares tumbling and no doubt rattled some of the most high-profile hedge fund managers holding sizable stakes in the company, including Tiger Cub Viking Global Investors, the largest shareholder.
Since bottoming at $9.47 on October 11, however, the stock has rebounded by more than 56 percent, including a rise of more than 20 percent on Tuesday alone, when it closed at an all-time high of $14.81.
The stock Tuesday was partly boosted by a report from gurufocus.com that Baillie Gifford bought more than $1 billion of Ginkgo Bioworks stock for between $11.11 and $13.28 per share.
The Scottish investment giant joined a slew of hedge fund honchos who already own sizable stakes. These are led by Viking, which is now the largest shareholder, while the stock, in turn, is the firm’s largest U.S. long position, according to regulatory filings.
Cascade Investment, Bill Gates’ private investment arm, was the second largest shareholder when the company went public.
Two other firms known for their hedge funds also owned more than 5 percent of the shares before Ginkgo went public: Senator Global Opportunity Master Fund owned 5.8 percent, and entities affiliated with Anchorage Capital Group owned 5.4 percent.
Other hedge funds owned much smaller stakes: Casdin Partners Master Fund, entities associated with Millennium Management, Citadel, 40 North Management, Highline Capital Master Fund, and Tudor Investment Corp., through an entity called Xantium Partners.
Ginkgo Bioworks went public September 16 when it completed its merger with the special purpose acquisition company Soaring Eagle Acquisition Corp.
Ginkgo Bioworks says it uses synthetic biology “to grow products instead of manufacturing them.”
It explains that it’s building a platform to enable customers to program cells as easily as they can program computers. The platform enables biotechnology applications across a wide array of markets, from food and agriculture to industrial chemicals and pharmaceuticals, it says.
The company disclosed in a regulatory filing that it had nearly $88 million in revenues in the first half of this year.
However, it also reported a $117 million loss from operations, nearly triple the prior year.
In its report dated October 6, Scorpion called Ginkgo “a colossal scam, a Frankenstein mash-up of the worst frauds of the last 20 years.”
Noting the $23 billion market cap at the time, Scorpion added, “It is rare to see a related-party scheme on Ginkgo’s scale in the U.S. markets — it is, quite simply, the U.S. version of the ‘China Hustle.’”
Scorpion asserted that Ginkgo’s business model is “based on a dubious shell game,” claiming that the majority of its foundry revenue — “an absurd 72 percent in 2020, and essentially 100 percent of its deferred revenue” — [is] “derived from related-party ‘customers’ it created, funded, controls, or influences via its ownership position and board seats.”
“Investments into these entities by Ginkgo and its largest investors are recycled back to Ginkgo and recorded as deferred or current revenue,” Scorpion added. “The scheme reflects its woeful, decade-long failure to derive real revenue from third-party customers, forcing it to cover it up with a ploy that we believe to be enabled by its largest holders.”
In other words, Scorpion claims that “essentially all” of the company’s foundry revenue is derived from related parties, “suggesting that Ginkgo has engaged in a brazen effort to misclassify and misreport related party revenue and deceive investors with phony accounting.”
As for Viking’s role, Scorpion asserts: “At one related-party ‘customer’ of Ginkgo’s after another that we investigated, we encountered Viking — playing a central role or lurking in the background.”
Ginkgo as well as Viking did not respond to requests to comment.
Who is Scorpion?
The firm was founded by Kir Kahlon, who in his bio says he has exclusively focused on shorts since 2013, with a particular focus on frauds, and promotes and directs the firm’s idea generation and research activities.
He most recently worked for Seligman Investments. Prior to that he was a consultant with Tiger Global Management, focusing exclusively on what he calls deep-dive investigative shorts. His first job was with Carl Icahn.
On its website, Scorpion detailed the performance of each of the six shorts it has published on, from its last close prior to publication through October 5, 2021.
They have all declined, with decreases ranging from 25 percent to as much as 53 percent. More significantly, they have all handily outperformed the stock market during the period.
Three of the reports were published this year:
Since January, shares of specialty medical device maker Nevro have declined 29 percent, while the S&P 500 has risen 16 percent.
Since April, EV battery developer Quantumscape has fallen 45 percent, versus a 5 percent gain for the S&P, while digital cell biology company Berkeley Lights is down 41 percent since September, with the S&P down just 2 percent.
Currently, Ginkgo Bioworks’ stock has the fourth highest borrow fee among all shorted stocks tracked by S3 Partners. However, the company’s short interest as a percentage of its float is a very low 1.49 percent.
So, is Scorpion right? If so, why aren’t the high-profile shareholders bailing on the stock? It could be because most of the shares are locked up until mid-March.
“It has a thin float and the sell side is supporting the stock with puff-piece research,” sniffs an investment pro and a big fan of Kahlon’s research.
One thing is for sure: When it comes to the stock market, reality will eventually prevail and the stock will be priced accordingly.
When, and at what price, we don’t know yet.
