This Small-Cap Stock Announced a Deal With Eli Lilly. Then Its Shares Doubled
Key Points
Ginkgo Bioworks and Eli Lilly announced a partnership last month focused on AI drug discovery.
The stock has skyrocketed since the partnership was announced.
Ginkgo has made many deals in the past, but it has struggled to generate consistent growth, and it remains deeply unprofitable.
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Eli Lilly (NYSE:LLY) is a top healthcare company, and it has a ton of money it can afford to invest in emerging opportunities. Artificial intelligence (AI) is one of the biggest ones right now, as using AI to accelerate drug discovery could do wonders for its business.
The company has launched Lilly TuneLab, which uses AI and machine learning to potentially speed up drug discovery efforts. Last month, Lilly reached a deal with biotech stock Ginkgo Bioworks (NYSE:DNA), which programs cells. Ginkgo has billions of data points that Lilly can leverage, and these can be made available quickly with the help of AI.
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The excitement around this development appears to have created a tremendous amount of bullishness around Ginkgo's stock, which has now doubled in value since that announcement came out on Sept. 15. Its market cap is around $1 billion. Is it too late to buy shares of Ginkgo, or could there still be more gains ahead for investors who invest in the business today?
Image source: Getty Images.
Deals haven't translated into strong financials for Ginkgo in the past
Ginkgo has secured deals with many types of companies in the past, but its financial results remain choppy, and profits remain elusive.
In its most recent quarter, which ended on June 30, Ginkgo's revenue totaled $20.2 million, a sharp decline from the $39.1 million it reported in the same period a year ago, as the company has been in the midst of restructuring efforts. And even with lower operating expenses in the most recent quarter, the company's operating loss of $58.5 million was slightly worse compared with the $58.2 million loss it reported a year ago.
While there is significant potential for Ginkgo in the healthcare industry, the problem is that the numbers just aren't there to show that the business is on the right track. And although the stock has been rallying of late, it's still down an incredible 97% in five years.
Ginkgo's stock remains highly risky
Investor sentiment around Ginkgo has improved significantly since the company announced its deal with Eli Lilly. Prior to that, it was looking like 2026 would be another down year for the stock.
However, investors should tread carefully here because this is not exactly new territory for Ginkgo. It's been involved in many deals in the past, with seemingly plentiful growth opportunities ahead, only for the results to fail to live up to expectations. The same could happen for investors who invest in the stock today. While its ambitions are high, that doesn't mean there will be a payoff for investors who buy today.
Taking a wait-and-see approach is the safest option for investors today, because until Ginkgo can generate some much stronger results, it'll remain a highly risky investment to own.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Eli Lilly. The Motley Fool has a disclosure policy.
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