TWST - Twist Bioscience: Evaluating Its Conglomerate Of Innovation Growth And Vulnerabilities

2023-08-06 00:56:20 ET

Summary

• Twist Bioscience's fiscal Q3 results show increased revenue and orders, innovative developments, and concerns over net losses and expenses.
• The company's future plans focus on growth through new manufacturing sites, product expansions, and hiring, with attention to financial challenges.
• Investment recommendation for Twist Bioscience is a "Hold," reflecting positive growth prospects and uncertainties, including financial stability and inconsistent growth.

Introduction

Twist Bioscience ( TWST ), incorporated in Delaware in 2013, is a synthetic biology firm with a groundbreaking DNA synthesis platform. Utilizing proprietary technology, they write DNA on silicon chips, merging it with software, infrastructure, and e-commerce to offer quality and cost-effective products. Their innovative approach serves diverse industries like healthcare, agriculture, and industrial materials.

Recent developments: Twist reported fiscal Q3 earnings: EPS of -$1.01 beats by $0.13, revenue up 13.6%.

The following article analyzes Twist's Q3 financial results, highlighting revenue growth and innovative developments, while also emphasizing concerns over operating expenses, net losses, and a mixed stock picture, ultimately recommending a "Hold" investment stance.

Fiscal Q3 Earnings

In the third quarter of fiscal 2023 , Twist reported total orders increasing to $63.8 million from $59.7 million in the same period of fiscal 2022. Revenue also grew to $63.7 million, up from $56.1 million, while the cost of revenues saw an increase to $41.8 million from $31.0 million. There were reductions in R&D expenses to $24.5 million from $36.8 million, and selling, general and administrative expenses to $46.1 million from $53.7 million. The net loss narrowed to $57.4 million or $1.01 per share, down from $60.5 million or $1.08 per share. The company's cash, cash equivalents and investments were solid at $357.1 million as of June 30, 2023.

Twist updated its full fiscal year 2023 guidance, now expecting revenue between $241 million and $242 million, SynBio revenue around $98 million, NGS revenue approximately $120 million, and Biopharma revenue between $23 million and $24 million. The gross margin is projected at 36%, with operating expenses, including R&D and SG&A, at about $308 million. The expected operating loss is around $220 million, with capital expenditure at $35 million and projected year-end cash, cash equivalents and investments for FY23 at $325 million.

Balance Sheet

Looking at the balance sheet for Twist, I observe several key points. The revenues have increased from the previous year, which is a positive sign. However, there's an escalation in operating expenses, including costs for research, development, and selling. Despite the growth in revenue, the company is consistently posting net losses, and a sharp increase in operating expenses underlines a high rate of cash burn. My attention is also drawn to the drop in cash and cash equivalents from $378.6 million to $307.4 million. While the company's liquidity seems reasonable with total current assets at $445.5 million, the continuous losses and depletion of cash reserves could suggest that additional financing might be required within two years if the company continues operating near current losses.

Valuation, Growth, & Stock Momentum

Seeking Alpha data presents a mixed picture for Twist. Valuation metrics are mostly not applicable ((NM)), with a C- grade and a price-to-book ratio of 1.68, suggesting the stock may be fairly valued. Growth metrics, graded at C+, highlight increasing sales and revenue YoY, but without available EPS figures, the growth seems to be inconsistent and not translating into profits, reflected by negative margins and negative returns on equity and assets. Momentum over the past year has been volatile, with strong three-month performance followed by significant declines over six, nine, and twelve months, earning a B- grade.

Growth Initiatives

In their most recent earnings call , Twist Bioscience's management discussed significant growth initiatives centered around their new manufacturing site, referred to as the "Factory of the Future." They emphasized the successful shifting of SynBio product production to this site and celebrated record revenue, partly from manufacturing at the new location. Having invested $100 million in the site, they shipped 159,000 genes from Wilsonville in the quarter, significantly more than from South San Francisco.

Management also highlighted the continued expansion of their customer base, focusing on speed and planning for the introduction of a disruptive product known as "fast gene." Alongside this, they are also working on software improvements, process refining, retraining manufacturing associates, and hiring for their e-commerce platform to enable dynamic pricing.

Further, the company continues to see positive feedback in their NGS panels and launched an RNA seq portfolio, expanding market opportunities. In the Biopharma area, challenges have led to lower numbers, but they remain optimistic with strong interest from top pharma companies and plans to double their sales team. Additionally, Twist expects to demonstrate an end-to-end gigabyte Century Archive workflow by the end of 2023 and launch a terabyte solution by 2025.

The discussion also highlighted a substantive action to accelerate the path to profitability through manufacturing shifts and resizing and announced key executive hires to help accelerate their transition into the next phase of skilled profitable growth.

My Analysis & Recommendation

In conclusion, Twist Bioscience's fiscal Q3 performance paints a picture that is both intriguing and complex. As an investor, one can't help but be drawn to the company's innovative approach and burgeoning growth in areas like healthcare and industrial materials. Their recent investments in the "Factory of the Future" and the expansion of their SynBio products are promising signs of future potential.

On the positive side, the 13.6% revenue growth and the beat on EPS are encouraging. The market rewarded Twist, boosting its stock 11% the day of their earnings report. The company's consistent expansion of its customer base and ambitious plans for new products demonstrate a strong forward-looking strategy. Their efforts to shift to profitability and hire key executive positions align well with long-term growth expectations.

However, there are negative aspects that cannot be overlooked. The escalation in operating expenses and consistent net losses raise concerns about the company's financial sustainability. The drop in cash and cash equivalents could imply the need for additional financing, and the mixed picture presented by valuation and growth metrics adds uncertainty.

So, is TWST an attractive investment? For a growth-oriented investor willing to accept higher risk for the potential of higher reward, Twist might indeed be an appealing opportunity. The company is clearly on an upward trajectory in terms of innovation and market penetration. However, for conservative investors seeking stable returns and lower volatility, the red flags concerning finances and the inconsistent growth might be cause for hesitation.

Given the blend of positive growth prospects and negative financial signals, my investment recommendation for Twist would be a "Hold." This reflects a balanced view of the firm's potential and uncertainties. Current investors may see reason to maintain their positions and monitor the company's progress toward profitability and reduced expenses, while potential new investors might approach with caution, keeping a close eye on the evolving financial landscape.

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