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2 Cathie Wood Biotech Stocks That Could Be Worth the Risk

Cathie Wood's commitment to buying shares of businesses working on disruptive innovations, via her ARK Innovation ETF and ARK Genomic Revolution ETF, makes her investing style very much on the riskier side of the spectrum -- especially when she invests in already risky areas like biotech. But if her theses are correct, the upside to investors could be tremendous, assuming they can tolerate what might be a very long and bumpy ride between buying shares and seeing a payoff.

On that note, let's examine a pair of Cathie Wood's picks that are prototypical of her high-risk, high-reward approach to growth stock investing.

1. Ginkgo Bioworks

You've probably heard of semiconductor foundries, which take customers' designs for microchips, clarify any outstanding technical details that are blocking implementation, and then manufacture them at an industrial scale. The point of working with a foundry is that its massive manufacturing capabilities grant it access to economies of scale, so its customers can procure customized chips at a far lower cost per unit than they'd need to shell out if they tried to produce them in-house.

Ginkgo Bioworks (NYSE: DNA) aims to be a biofoundry platform for the biopharma industry, taking blueprints for customized microorganisms or biomolecules and then producing them cheaply and in vast quantities.

Cathie Wood last bought Ginkgo on May 10, and Ark Invest owns around 10% of the company, though it only represents around 1% of the value of her aggregated portfolios. The rationale behind her investment is clear.

Biofoundries are not anywhere near as widespread or accepted in biopharma as semiconductor foundries are in the semiconductor industry. If Ginkgo can make the concept work profitably at scale, it will be the first, largest, and most well-known biofoundry to do so, and that will make it a lucrative business to own shares of. In such a situation, the scale required for its manufacturing operations to be profitable will act as a natural moat against competitors, which will likely be smaller and thus more expensive for customers.

Still, Wood is known for investing in companies that aren't fully proven yet, and this one is no exception. Ginkgo's revenue in the first quarter was $37.9 million, but its operating losses were a staggering $178 million.

Management has not provided any guidance on when the company will be profitable, though it plans to report positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) before the close of 2026. At the same time, its quarterly operating margin hasn't been positive at any time in the last three years, nor is there a clear trend toward that occurring. So, investors who buy this stock are betting that efficiency will soon start to increase rapidly, which may or may not happen.

2. Recursion Pharmaceuticals

The biotech Recursion Pharmaceuticals (NASDAQ: RXRX) is creating a drug discovery and development platform that heavily utilizes artificial intelligence (AI). The aim is to pass on lower costs to clients and reduce failure rates in clinical trials. It's also pursuing more traditional biotech fare, like developing drugs itself and selling promising leads for new medicines to other businesses, so it has the potential to rake in revenue from at least three different segments.

Cathie Wood has been buying the stock regularly over the past few months, and it accounts for nearly 2% of Ark Invest's holdings.

The desired endgame for her investment is a situation in which Recursion's medicines are commercialized, its platform attracts many moneyed collaborators, and its cache of leads and biological data draws licensors far and wide. This would grant the company a flywheel in which low-cost and high-margin sources of revenue, like licensing its data or granting access to its AI platform, provide the funds for higher-cost and riskier sources of revenue with more potential upside, like research and development (R&D) of new therapies.

But Recursion is a long way from that favorable state of affairs. Its most advanced programs are only in phase 2 clinical trials, so it could be years before they reach the market, if they ever do. While it has a couple of high-profile collaborators, like Roche, its revenue in Q1 was only $13.8 million, far lower than its R&D expenses of $67.6 million. So this is another company that isn't proven just yet, and the risk of an investment losing value is high.

However, as its three-pronged approach to doing business isn't nearly as capital-intensive as Ginkgo's, it's probably a somewhat safer bet. If you're so inclined, it's not a bad idea to nibble on a few shares.

Should you invest $1,000 in Ginkgo Bioworks right now?

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends Roche Ag. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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