A Home Run Stock for 2012

I always love a healthy debate, so when my Foolish colleague Travis Hoium wrote that Solazyme (Nasdaq: SZYM  ) was a "green-energy money pit," I couldn't resist taking the bait.

While I certainly agree with Travis -- there will be obstacles along the way -- I'm willing to dub Solazyme as my home run stock for 2012. Read below to find out why, and get access to another alternative energy play I'm excited about.

What they do
I've written about the specifics of Solazyme's business model before, but here's the view from 30,000 feet: The company can take a number of inputs (corn, switchgrass, sugarcane, waste streams), feed it to their patented microalgae, and those microalgae can produce different types of oils for different industries.

The company is specifically developing three different revenue streams moving forward. The first is to use the oil to produce biofuel. The company already has a partnership in place with Chevron (NYSE: CVX  ) , and its fuel was successfully tested on a United Continental (NYSE: UAL  ) flight earlier this year.

Solazyme also tailors its oils for healthy dietary products available at both Whole Foods (Nasdaq: WFM  ) and GNC stores.

The company's last revenue stream is in producing industrial chemicals for larger companies. Solazyme already has partnerships in place with Dow Chemicals (NYSE: DOW  ) and Unilever to help the company test its products in this market.

Here's what to focus on
As Travis rightly points out in his piece, securing feedstock (the sugarcane, corn, etc. that is fed to the microalgae) is the key to this company's future.  Drawing from our past experience with ethanol, Travis states: "Moving to a large scale means sourcing more fuel and building larger plants. When it became time for corn ethanol to make that jump the increased demand for corn resulted in higher prices and any advantage ethanol had evaporated."

It is here that I believe Solazyme has an upper hand over both those who tried and failed to use ethanol, and rival Amyris (Nasdaq: AMRS  ) . Amyris produces biofuels using plant-sourced sugars as feedstock. Solazyme, much like Rentech (AMEX: RTK  ) , has multiple inputs for its feedstock -- not just plant-sourced sugars -- including several forms of biomass, and even waste streams.

This means that whereas ethanol failed when its popularity raised the price of corn to a point where it was no longer cost effective, Solazyme and Rentech can spread their feedstock across many sources, including human waste streams, which I'm sure we'd be OK with using up altogether.

As things stand now, it seems that Rentech is more focused on their fertilizer business, and Solazyme already has feedstock agreements in place to meet 90% of expected capacity through 2015.

As I reported in August: A joint venture with French Roquette Freres has ensured that feedstock will be provided for Solazyme's food brands. A similar venture with Bunge Limited in Brazil promises to provide Solazyme with access to the sugarcane in a new 100,000 metric-ton facility.

And adding to the string of good news that's been coming from the company lately, the Navy just announced it'll be buying $12 million of advanced biofuels in an agreement that includes Solazyme.

These trends, both in terms of gaining customers and securing feedstocks, clearly put Solazyme in the driver's seat among biofuel producers.

Tread carefully
As any baseball fan knows, your favorite home run hitter is usually the one who leads the team in strikeouts as well. The same goes for the stock market. The companies with the greatest potential are often the riskiest.

Travis is right to point out that if Solazyme (or its competitors) don't secure sustainable feedstock streams as they ramp up their production and scale, they will join the long list of has-been green energy stocks. If, however, they continue to innovate and find ways to take the things we truly consider garbage (landfills, anyone?) and turn it into oil, then the sky could be the limit. That's why I've initiated a green-thumb on my CAPS profile for the company.

I currently hold about 1.4% of my portfolio in Solazyme, so I'm not placing heavy bets here. I will, however, be following the company's progress closely. Add Solazyme to your Watchlist, and you'll be able to do the same.

Finally, if you'd like to find out about another alternative energy play that I've actually put more of my money into than Solazyme, I suggest you check out our special free report: "One Stock to Own Before the Nat Gas Act Becomes Law."

Inside you'll find out about a company that can benefit from the natural-gas movement without having to actually extract the stuff from the earth. I've already put twice as much of my money into this company as I have into Solazyme. Get your report today to find out which company this is; it's absolutely free!

Fool contributor Brian Stoffel owns shares of Whole Foods Market and Solazyme. You can follow him on Twitter at @TMFStoffel. The Motley Fool owns shares of Solazyme, Whole Foods Market, and Amyris. Motley Fool newsletter services have recommended buying shares of Chevron and Whole Foods Market. 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 (9) | Recommend This Article (13)

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 December 08, 2011, at 6:26 PM, Mega wrote:

    "Solazyme also tailors its oils for healthy dietary products available at both Whole Foods (Nasdaq: WFM ) and GNC stores."

    That doesn't sound like a very good idea. Don't people buying dietary products (and food) want natural oils, not bio-engineered synthetics?

  • Report this Comment On December 09, 2011, at 9:35 AM, Intrepidation wrote:

    Agreed, though maybe not if you shop at GNC or on QVC!

    Regarding the biofuel stream, their website states they're the worlds largest algal biofuel producer at 500,000 liters over a 13 month period, which is 2400 barrels. The US consumed 6 billion barrels last year.

  • Report this Comment On December 09, 2011, at 11:55 AM, TMFCheesehead wrote:

    @MegaShort-

    Fair point, though I shop at WFM, I don't buy their "Golden Chlorella" brand. You'd have to ask people that do.

    @wideeyed1-

    So is that a knock on the company, or great big "There's-a-lot-of-room-for-growth" statement?

    Brian Stoffel

  • Report this Comment On December 09, 2011, at 2:10 PM, FutureMonkey wrote:

    The health/nutritional supplements are algae sourced, so plenty natural and indeed much more appealing to health minded folks than fish sourced omega III fatty acid supplements (mercury, non-sustainable. DHA is the wonder molecule in everything from infant formula, milk, eggs; memory boosters, etc. That segment should be lights-out winner for the health crowd.

    That segement and their skin care products alone may be worth the market cap, but to hit a homerun they need to leverage their biofuel contracts -- if the US Military signs up that could be huge windfall as the US military is the single largest consumer of fuel in the world.

    Brian....Question: How tight is their patent protection? Are they going to be over-run with competitors or are they a lead dog with a pack of hungry lawyers to keep competition at bay?

  • Report this Comment On December 09, 2011, at 2:55 PM, FutureMonkey wrote:

    Brian 2nd Question: Cash burn was ($25M) in Q3 with about $250M in the bank. Is management confident about flipping to profitable before the cash runs out? Are you confident?

    Looking at their ASP of $1000-$5000 per Metric Ton of biofuel and $2500-$20000 per Metric ton of nutritionals, coupled with 100MT capacity in 2013, 300MT in 2014, and 450-500MT in 2015. Taking the low end estimates, looking at sales in the neighborhood of $100M-300M by 2013 and north of $750M - $1B by 2015. They also are projecting some fat margins. Are these numbers realistic or total pie in the sky?

  • Report this Comment On December 09, 2011, at 4:20 PM, TMFCheesehead wrote:

    @FutureMonkey-

    They have taken steps to secure patent rights to protect their (1) products, (2) manufacturing components, and (3) manufacturing processes. That being said, they also acknowledge that enforcement in certain countries are lax--Brazil in particular since they have a working agreement w/ Bunge that will locate some production facilities within the country.

    In terms of cash burn, here's the thing to know, before 2010, they'd never received a cent from actual product sells (most of it was money received from R&D).

    Right now the gross margins on the products that they sold were about 70% for the year.

    In terms of production, did you factor in the Peoria plant, which will reach 1,820MT at peak production?

    Brian Stoffel

  • Report this Comment On December 09, 2011, at 10:58 PM, Chontichajim wrote:

    I have 100 shares just to keep up on the progress and interesting reading. They do have a number of product lines and were a local IPO (San Jose) at a time when there are slim pickings among true start-up IPOs. Won't replace CVX, BP, or TOT but the partnerships with larger firms in both cosmetics and fuel have promise.

  • Report this Comment On December 10, 2011, at 7:59 AM, Intrepidation wrote:

    A fair question Brian. Not a knock on the company, just a general ambivalence toward biofuel. I've read it takes an acre of arable land and 400,000 gallons of water to produce 10 barrels of biofuel. I've filed it under; "there's gotta be a better way". Maybe that's Solazymes upside; that's what they're looking for too.

  • Report this Comment On December 10, 2011, at 2:19 PM, Darwood11 wrote:

    With the politician's backing of ethanol, something will have to change for advanced biofuels to move up.

    On the other hand, all we need is a few bad years of crop production caused by climate, etc. and the shift may occur.

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