TD Cowen names top smidcap stock pick

TD Cowen remains constructive on Twist Bioscience (NASDAQ:TWST), citing accelerating AI-driven wet lab and data demand, a stronger base business, and room for margin expansion. The company reported second-quarter revenue of $111 million, beating consensus, while analysts including TD Cowen and Leerink raised price targets and new coverage was initiated by Canaccord Genuity and Piper Sandler. TD Cowen sees TWST approaching profitability with adjusted EBITDA breakeven targeted in fiscal Q4 and NGS revenue expected to make up a majority of FY26 sales.

Analysis

TWST is increasingly a “through-the-cycle capacity call,” not just a quarterly beat story. The underappreciated setup is that AI-related wet-lab demand is forcing customers to re-order on shorter cycles and higher mix complexity, which tends to improve utilization before it shows up cleanly in headline revenue. That matters because once a platform business gets above a threshold of fixed-cost absorption, gross margin inflects faster than consensus models usually allow, creating the possibility of multiple expansion before profitability is fully visible in GAAP terms.

The competitive implication is more interesting than the company-specific narrative: as AI discovery pipelines scale, smaller biotech and pharma teams will increasingly outsource synthesis and sequencing work rather than build internal capacity, which should pressure legacy lab-service providers with weaker throughput economics. TWST’s silicon-based economics also raise the bar for newer entrants that rely on labor-heavy workflows; competitors can match price on a pilot order but struggle to match consistency and turnaround at scale. If this thesis is right, the second-order winner is not just TWST but adjacent tools names with exposure to automated, high-volume workflows, while low-efficiency CROs and niche oligo suppliers face margin compression.

The main risk is not demand exhaustion but expectation saturation: once the market begins capitalizing the AI tailwind and margin expansion simultaneously, any slip in cadence or conservative guidance reset could compress the multiple quickly. The catalyst window is the next 1-2 quarters, when investors should look for evidence that revenue acceleration is converting into operating leverage rather than merely masking higher opex. The contrarian view is that the stock may be getting ahead of itself on a multi-year AI narrative that still requires empirical proof in end-market budgets; if AI order growth normalizes from “dramatic” to merely strong, the re-rating may stall even if fundamentals remain healthy.

Key Decisions for Investors

• Go long TWST on any post-rally consolidation over the next 1-3 weeks; target a 6-12 month hold for margin inflection and profitability re-rating, with upside skew if management confirms operating leverage accelerating faster than guidance.
• Use TWST Jan-2026 call spreads instead of outright calls to express the view that the stock rerates before full profitability; risk/reward improves if the market overvalues timing uncertainty.
• Pair trade: long TWST / short a lower-quality life-science tools or outsourced lab-services peer with weaker gross margin leverage; the trade should work over 3-6 months if AI-driven demand is selectively rewarding scalable platforms.
• If TWST rallies sharply on another beat, consider trimming into strength rather than chasing; the key downside trigger is any revenue beat paired with unchanged margin guidance, which would suggest the AI narrative is already priced in.