A few things are certain in life. The sun will always rise in the east and set in the west. Taxes suck. Pizza will always taste better the next day. And Twist Bioscience will always underpromise and overdeliver.

If only the other founders across synthetic biology could emulate cofounder and CEO Emily Leproust on this quarterly ritual.

Twist Bioscience outpaced its own financial guidance during the fiscal second-quarter of 2024, which is something investors have come to expect from the DNA synthesis pioneer. What was more interesting was the surge in the order backlog catalyzed by the full launch of Express Genes in late January 2024.

Historically, the order backlog for every business segment has tracked closely to the revenue generated each quarter. That relationship was disrupted in the company's unofficial synthetic biology segment, which generated revenue of $29.8 million and had orders of $44.9 million. For comparison, the segment had $26.8 million in revenue and orders of $29.2 million in the first quarter of the fiscal year.

This trend suggests Twist Bioscience is on pace for a healthy acceleration of revenue in the second half of fiscal 2024 as it works through the backlog. It's too soon to say whether the business will continue to see high demand for Express Genes or if the excitement will level off after launch subsides, but investors can watch a key metric in the fiscal third quarter report scheduled for August.

By the Numbers

Twist Bioscience is objectively heading in the right direction.

Revenue is growing at a healthy clip, gross margin is slowly improving, and operating expenses are growing at a manageable pace (although the business has a somewhat bloated level of overhead). A favorable trend for those key operating metrics is also driving a swift improvement in operating cash outflow, which was 58% lower in the first half of fiscal 2024 compared to the year-ago period.

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The business has had a stable geographic revenue mix since mid-2022. It still generates about 60% of revenue from the Americas, 30% from Europe and Middle East, and the remaining 10% from Asia. The geopolitical forces sweeping through the global economy will have an especially acute impact on the bioeconomy, but Twist Bioscience isn't too exposed – the higher the reliance on U.S. customers, the better.

It's interesting to me that the application revenue mix and customer revenue mix have been stable in the span, too. The business generates about 55% of revenue from next-generation sequencing (NGS) applications, 30% from synthetic genes, and the remaining 15% from a hodgepodge of nerdy applications. Similarly, the business generates about 55% of revenue from customers in healthcare, 25% from industrial biotech, and 18% from academic groups.

It's no mistake Twist Bioscience has leaned into NGS tools during its recent prioritization of operating efficiency – it's the largest and most profitable segment for the business. That has come at the expense of biopharma applications, which were held up as a key growth area not too long ago. The longer lead times for these customers and applications mean the company is better off waiting for milestones and royalties to kick in years from now than going all-in.

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Overall, the business is off to a great start in the first half of fiscal 2024. But some additional context is helpful.

Twist Bioscience is on pace to report an operating loss of approximately $183.4 million in fiscal 2024, according to the current model. That's a meaningful improvement from the $217 million operating loss in fiscal 2023. The operating margin of negative 58% is also markedly better than negative 89% last year and negative 115% in the two previous years.

That means the business might only burn $91 million in cash during fiscal 2024, allowing it to exit September with approximately $245 million in cash. If gross margin steadily improves to 60% and revenue grows at 25% for the next several years, then that's probably a long enough cash runway to reach cash flow positive operations and profitability. The question becomes: Is 25% revenue growth realistic? It's certainly plausible.

Does Express Genes Mark Another Hit for Twist Bioscience?

One of the most attractive things about Twist Bioscience as an investment opportunity is the diversity of the business. The company can serve customers across multiple independent industries and applications. A slowdown in synthetic biology applications might not necessarily predict a slowdown among DNA sequencing applications, and vice versa.

Choosing a new application area, then launching and ramping into it, isn't guaranteed to succeed. The company has executed very well within the NGS tools market, which now provides most revenue and gross profit. But it whiffed when eyeing the opportunity in biopharma and antibody discovery applications, which haven't delivered revenue growth in two years.

That makes the early success of Express Genes more soothing to anxious investors. Express Genes is a premium product offering allowing customers across biopharma, industrial biotech, and genetic testing to realize 30% to 55% reductions in shipping times compared to the company's standard offering.

It's still early. The full launch only occurred on January 24 and mapping order backlogs onto future revenue growth is more art than science for a new product offering. But the launch was aligned with a best-case scenario.

• Express Genes appears to be a hit – so far, at least. The business reported fiscal second-quarter 2024 revenue of $29.8 million vs. an order backlog of $44.9 million for its unofficial synthetic biology segment. That compares to $26.8 million in revenue and orders of $29.2 million in the last full quarter prior to launch.
• For the first time ever, the order backlog for synthetic genes (which represents 30% of total revenue) exceeded the order backlog for NGS tools (which represents 54% of total revenue).

This is a great start. Can the momentum keep up? Investors will feel more confident in their answer after seeing fiscal third-quarter 2024 results reported in August. Two things I'll be watching.

First, investors want to see if the numbers of customers and orders are increasing with the order backlog. The ambitious vision of Express Genes is that by offering high-quality synthetic DNA with fast turnaround times, Twist Bioscience can convert stubborn "DNA Makers" – labs that find it easier to create their own genes and just eat the labor costs – into customers. Faster shipping also makes the brand more attractive in a jampacked competitive landscape.

The too-early-to-tell signs are encouraging, but not conclusive. Twist Bioscience shipped a record number of genes, reported the highest number of shipments in five quarters, and saw a slight uptick in customers. The business has been struggling to grow the number of customers for the last eight quarters. Will these numbers pop in the fiscal third quarter?

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Second, Express Genes is a new offering, but it has some cannibalization risk. There are customers who were previously purchasing synthetic DNA from Twist Bioscience who are happy to pay a premium price for faster turnaround times. These customers result in only marginal revenue and gross profit growth. Signing up brand new customers and accounts will be a much bigger growth driver, but it's too soon to say how many new customers come knocking. It's likely that Express Genes has reset the level of quarterly customers higher, but how much higher?

Keep in mind the launch of NGS tools had no cannibalization risk, which helps to explain the portfolio's ongoing success. Express Genes are different. This is certainly something to watch as the quarterly periods tick by, as cannibalization risks have eaten shareholders alive for other companies in the Solt DB Invest coverage ecosystem – namely PacBio and 10x Genomics. Wall Street tends to only pay attention to this risk when it's too late for individual investors to course correct.

Scenario Analysis

My modeling is based on valuing assets, contextualizing competitive landscape dynamics, and weighing the probabilities of favorable and unfavorable scenarios. If you choose to invest in Twist Bioscience, then carefully weigh the following.

Increased 2024 Model

The current model is based on 2024 financial projections. It was updated to include higher revenue growth and an improved gross margin.

• Fiscal full-year 2024 revenue is now expected to be $314.3 million, up from $304.831 million in the previous model. The company's guidance now expects revenue of $302 million at the midpoint.
• Fiscal full-year 2024 gross margin is now expected to be 42.1%, up from 41.2% in the previous model. The company's guidance now expects a gross margin of 41.75%.

I consider Twist Bioscience relatively easy to model, so the increase in my model's revenue expectations is a significant development. However, the valuation premium investors should feel comfortable paying hasn't changed.

Short Squeezes and Share Pops

Shares of Twist Bioscience surged 29% the day after quarterly results were announced (May 3, 2024). Although the financial trends were favorable, business performance wasn't the driver of the stock's really good day.

Instead, shares popped on a short squeeze. The stock's daily trading volume surged to 4.458 million shares compared to the daily average of 0.871 million over the previous three months.

Twist Bioscience had nearly 27% of its outstanding float sold short heading into earnings. That's really high! For context, that's a tick higher than Coherus BioSciences, which has almost entirely lost the faith of investors. The DNA synthesis leader was overvalued according to my modeling, but that short percentage was never sustainable.

How to Approach

There are many ways to be active in the stock market. Solt DB Invest takes a strategy-agnostic approach to biotech investing, which requires valuation discipline and a more active style (even for long-term positions). Here are different ways investors might approach Twist Bioscience as of this writing.

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Long-Term Investing

Given the open questions regarding the staying power of Express Genes and the fierce competitive landscape in DNA synthesis, investors should be careful buying shares with a sharply negative margin of safety. So far, Solt DB Invest modeling has accurately determined when the stock was overvalued and undervalued.

I do think shares will give up some of their recent gains and dip below $40 apiece fairly easily.

Trading (Shorter-Term)

Twist Bioscience is the 15^th most attractive biotech stock in the coverage ecosystem out of 16 stocks with modeling available as of this writing. It might not represent the most favorable trading opportunity at this time. I'm not going to comment on options strategies until Solt DB Invest is ready to responsibly communicate that information to investors.

Margin of Safety & Allocation

Twist Bioscience is considered a Growth (Speculative) position. The current modeled fair valuation for the company based on our 2024 model is below:

• Market close May 3: $41.18 per share
• Modeled Fair Valuation: $28.99 per share
• Allocation Range: Up to 2.5%

Twist Bioscience reported 60.557 million shares outstanding as of April 29, 2024. The modeled fair valuation above assumes 61.137 million shares outstanding, which is equivalent to 5% dilution.

Further Reading

• May 2024 press release announcing fiscal Q2 2024 operating results
• May 2024 regulatory filing (10-Q) detailing fiscal Q2 2024 operating results
• February 2024 research note describing the launch and importance of Express Genes

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