Lessons from Zymergen
On April 23rd Zymergen became a public company through an IPO (initial public offering) at $31/share. The stock shot up to $52/ share and was looking like a new Wall Street Darling, but then the stock plunged almost 84% to $7.85. What happened? Who is Zymergen? And what can we learn from this extreme volatility?
What Happened?
Zymergen describes themselves as a “biofacturing company using biology to reimagine the world.” Their number one product is Hyaline: an optical film made out of a biomolecule that is used for touch screens. Hyaline costs 90% less to produce than the current industry standard for touch screens.
On August 3rd, 2021 Zymergen announced that some key customers were having issues implementing Hyaline into their manufacturing process and that they expected to earn “immaterial” (aka zero) revenue from their products in 2021 and 2022.
Zymergen raised over $465 million in its IPO and now has $588 million in cash. For the second quarter, it expects operating costs of $100 million and total revenue of around $5 million. It is important to note that most of this revenue will come from R&D service agreements, not actual product sales. They also announced that the co-founder and CEO since 2013, Josh Hoffman, was leaving the company.
This was a complete 180 from what the company had announced 2 months previously where they claimed they would be generating revenue from Hyaline before the end of 2021.
After the 84% plunge to $7.85 the stock surged up 84% the following day to $14.45. This was after news broke that Cathie Wood’s Ark tripled their stake in the company. ARKG now holds more than 3.5 million shares.
As of market close on Monday August 23th, the dust has settled and the price sits at $10.78/share.
Source: Yahoo Finance
Takeaways:
This series of events offers many valuable lessons to the individual investor:
1. Individual stocks can be volatile
There are a lot of assumptions built into a stock price. If some of these key assumptions turn out to be false that price can plummet. Investor’s assumed that Zymergen’s projections were accurate, when that turned out to not be the case, the stock fell 84%.
2. IPO’s are unpredictable
New companies in emerging fields can seem like the next best thing, but they are hardly ever a guarantee. Large amounts of marketing dollars are used to promote a new company going public. What happens when the campaign is over? The numbers tend to scream much louder and weaknesses within the company are weeded out quickly.
3. Be Critical of Internal Projections
There are many external pressures that could incentivize executives to bend the truth and hide bad news. For example, many CEO’s compensation is tied to stock performance. An investor should always consider the possibility that the information being reported by an executive is overly optimistic. Look past the big promises and search for the hard numbers, the data. Holding a more conservative perspective can correct for heightened optimism.
What Can We Learn?
Zymergen is a cutting edge company that promises to change the world with their products. Unfortunately, science has not caught up with their vision yet. That didn’t stop them from promising investors everything was moving smoothly and raising millions of dollars in capital.
Companies like Zymergen offer a big risk, big reward scenario. Investors are buying the future potential of the promised technology. If a company can deliver on their promises there can be a huge payoff, but if they fail market reaction can be swift and punishing, sometimes pushing the price all the way to zero.
Investors who want to own cutting edge technologies in emerging sectors like biomanufacturing may want to consider investing in an ETF rather than individual stocks. For example ARKG (ARK Genomic Revolution ETF) invests in around 60 companies in the genomics space that will benefit from the “Genomic Revolution.” Owning an ETF can be less risky than owning individual companies because the risk is spread out across many different companies. If bad news should happen to one stock it doesn’t affect the portfolio as much because it is diversified with other holdings.
Wondering what you should be investing in? Want to invest in a smarter, more predictable way that won't expose you to 85% losses? Book a call on our calendar or email contact@hardycap.com for a complimentary consultation about your financial goals and situation.