Ginkgo Bioworks ($DNA) is a stock that I’ve heard a hell of a lot about. The idea of “DNA as a programming language” is something a lot of stocks and hype-mongers trade on, because it promises the insane growth of the Tech industry but with whole new markets where you can get in on the bottom floor. What if you could invest in Apple, Amazon, and Google in the 90s? Well now you can by investing in $DNA and other biotechs like it. Their tech is supposed to be the future, and is supposed to make us all a lot of money (if we invest in it).

Part of the appeal of investing in “DNA as a programming language” comes down to the concept of “total addressable market” or TAM. TAM is a way to calculate the greatest possible revenue you could ever achieve, by bringing your product to every person on earth who wants it and charging them a fair price. Valuation based on TAM aren’t necessarily ridiculous, Facebook is used by just about 1 out of every 2 people on earth these days, so if you had gone back to 2008 you could have realized just how monstrous Facebook would become by looking at their TAM (and deciding Facebook and not MySpace would win the war). So investing based on TAM might have made you money if you’d thrown it at Facebook. Sure, these days Facebook only gets a few bucks in ad revenue per person, that’s still several billion every year. So bringing your product to every single person in this wonderful world of ours, all 8 billion people, is almost guaranteed to make you some money.

Ginkgo and DNA-based companies like it have some eye-watering TAMs because DNA and biotech is so fundamental to everything the world economy does. Agriculture? Modern crops are all engineered (yes, even your GMO-free crops are engineered, they just use different techniques to get around people’s prejudices). Health? Modern medicines are all engineered and grown in cell culture vats. Commodities? Biochemists are already working on using engineered proteins to create all sorts of industrial chemicals, or to clean up industrial waste, so that’s yet another avenue for biotech revenue. There are endless possibilities for using proteins and cells in industry, so there are endless amounts of money you could conceivably make bringing your product to these industries. But what Ginkgo brings isn’t any particular protein, or any particular cell, they supposedly bring a platform to create all proteins, and all cells at a lower cost than anyone else. Ginkgo wants to be a shovel salesman in the Biotech gold rush, and they think they can sell shovels to every company on earth. Whether you’re a Big Pharma company producing drugs, an AgriTech selling seeds to farmers, or even a mega-factory trying to comply with the EU’s industrial pollution directives, biotechnology can help you and Ginkgo can help biotechnology.

Here’s what Ginkgo says it does: say you want to make a drug and get FDA approval to sell it to sick people. Your drug needs to meet the highest standards of quality control, every batch needs to be identical to the others in all the right ways so that what the sick people get is the same every time. Any sort of variation can be deadly in these cases, and the FDA looks very disapprovingly at variation for this reason. But producing a drug at scale is hard and expensive, even at the relatively modest scale needed for phase 1-3 clinical trials. This is supposed to be where Ginkgo comes in. They’ll create a modified cell for you which makes the drug all on its own. They’ll produce a purification pathway that is easy to use and gets consistent results. Then you can grow up that yeast cell into massive colonies (easy enough, yeast eat anything) and harvest them to purify the drug they are producing (again, this should work).

The problem is this pipeline doesn’t necessary lead them to the TAM-style valuation that once sent their stock price skyrocketing. Most drug products start by being produced in an academic lab at ultra-small scale, and for these purposes making the cells and purification pathways yourself is actually the cheaper option vs paying a big company to do it for you. Once you have a cell and a purification that sort-of works, you publish it and it gets picked up by some massive biotech that wants to monetize it. Now this company isn’t starting from a base of nothing, the work that the academic lab already published will probably be a very strong base from which the company can make its own cells and purification pathway (with only minor tweaks to what the academic lab did). And because it’s so easy to do this, again it rarely makes sense for a big company to partner with Ginkgo to do these things, especially when it’s not just the cost but also Ginkgo’s business model you have to deal with. See, when Ginkgo does something for a Biotech company, they don’t just as for money upfront. Ginkgo writes contracts that say that if you use the cells and purification pathways they create, then they will get a certain percentage of your revenue or profit (negotiable, of course). This was sold as an unbeatable deal that would catapult Ginkgo to the stratosphere and help them reach the valuation predicted by their TAM, understanding why this deal is failing is key to understanding why Ginkgo is failing.

I’ll talk more about the specifics of Ginkgo’s deal and why I think they will never manage to address their theoretical TAM in another blog post. For now, reflect on the fact that $DNA is in the exclusive club of stocks that lost over 85% of their value in the last year, $CVNA is another. I think both businesses were predicated on a business model that was more science fiction than fact.