Dada Stocks to Watch: Amyris Biotechnologies

This article is part of our Rising Star Portfolios series. Sean is co-manager of the Dada Portfolio.

Among other goals, the Dada Portfolio aims to give you stock ideas that you won't find anywhere else. Amyris Biotechnologies (Nasdaq: AMRS  ) is a recently IPOed company with no profits and very, very negative cash flow. (Welcome to Dada!) Nonetheless, I've had an eye on the company even before its September debut, and now that the stock has almost doubled since then, it's worth a closer look.

The business
Beer enthusiasts know the powerful effects of fermentation. Brewing yeasts take sugar and convert it into carbon dioxide and alcohol, making sure your pale ale stays frothy and potent. Not satisfied with the miracles of brew, the folks at Amyris decided to genetically modify the microorganisms to see whether they could stimulate the production of any other types of molecules that might be, ahem, more valuable to society.

Their first foray: artemisinin, an antimalarial drug. Supported by a grant from the Bill & Melinda Gates Foundation, Amyris succeeded, ultimately granting a royalty-free license to sanofi-aventis (NYSE: SNY  ) that will allow the European pharmaceutical company to use its technology for large-scale market production of this lifesaving drug.

Now, the company has turned its attention to farnasene, a molecule which could end up running your next diesel-powered car. Commercially known as Biofene, Amyris's newest yeast alchemy takes Brazilian sugarcane and ferments it into a renewable and sustainable petroleum replacement with many potential applications, including diesel and jet fuel.

The thesis
The technology involved here is pretty exciting, but I rarely invest in "tech" companies that are simply bleeding-edge. The best tech companies of our time have always been able to identify an underserved demand of some kind. In other words, they're consumer companies, more focused on how the technology affects the end user than on the technology itself.

That's why Amyris' "No Compromise" policy is so appealing. Amyris isn't asking for a change in consumer behavior. You won't have to stop more often for gas because their synthetic fuel is less efficient; the company says its products are just as good, if not better, than existing options in every respect.

Sadly, without a Ph.D in biomolecular chemistry, I cannot verify those claims. But the company's contract with Procter & Gamble (NYSE: PG  ) to let P&G buy farnesene for use in its consumer goods; its research collaboration agreement with French oil giant Total (NYSE: TOT  ) ; and its sales to Royal Dutch Shell (NYSE: RDS-A  ) seem to paint a pretty convincing picture of Amyris products' legitimacy.

The bottom line
I have to say, I love the concept here. I'm convinced that the alternative energy sector will change our lives in the coming years, but none of the mainstream plays on solar or wind really make sense to me. I may be echoing Vinod Khosla, but I really believe that for alternative energy to break through, the technologies must become economically sustainable without subsidies.

It'll be a long time before Amyris will be profitable and "valuable" on a traditional discounted cash flow basis, but its business strategy of  products that don't require its customers to make any trade-offs is the right one. Does that make now a good time to buy? I'd like to hear your thoughts. Leave comments below or visit the Dada Portfolio's discussion board here.

The Dada Portfolio, co-managed by Sean Sun and Ilan Moscovitz,is a part of the Rising Star series of real-money portfolios. A full list of our articles can be found on the Dada Portfolio Foolsaurus page. Follow us on Twitter @TMFDada.

Sean owns shares of Procter & Gamble. P&H and Total are Motley Fool Income Investor choices. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2011, at 8:44 PM, syntech wrote:

    Amyris is a startup in the emerging synthetic biology sector. In addition to biofuels, the technology can also be used to produce cheap vaccines, green industrial chemicals (green chemistry), etc. The technology is real, and is a step up from traditional Recombinant DNA technologies (e.g., reengineering bacteria to mass produce human insulin).

    The increase in Amyris' stock price corresponds with the release of a Presidential Bioethics Report on the safety and ethics of synthetic biology (can be downloaded at http://www.bioethics.gov/). The report received considerable national attention, including in the NY Times, and was produced in response to the Venter Institute (Craig Venter, formerly of Celera Genomics, helped decode the human genome) announcing that it had created a synthetic life form. Released on December 15, 2010, the report mentions Amyris in its short list of firms operating in the sector. Since the report was released, Amyris has been bid up over 50%. From my perspective, it seems like the good news is priced into the stock.

    Like Sean, I like the socially responsible concept of using biotech for the purposes of producing cheap energy alternatives, or providing developing countries with access to cheap vaccines. I also think Amyris has assembled a top-notch research and management team, and has strong partnerships to support its growth in the biofuel space. That said, I don't think now is the right time to buy this stock. After the quick increase in price, I'm waiting for the stock to fall below $25/share before buying. A couple months and this wave of initial enthusiasm should subside. For more cautious investors, there are other startups operating in the exact same space at far lower premiums, as well as far more established firms with earnings and a track record of moving research from the labs to the marketplace.

  • Report this Comment On January 24, 2011, at 9:59 AM, TMFSun wrote:

    Thanks for those notes syntech, very helpful :)

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