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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Forecast cloudy, with a chance of rust
Down 46% since its debut on the Nasdaq one year ago, renewable-energy stock Solazyme (Nasdaq: SZYM  ) has turned out to be one of the more disappointing IPOs of 2011. One analyst, however, thinks it could soon become the big success story of 2012.

Solazyme shares zipped up 9% Monday in response to news that its Brazilian sugar-to-oil processing center, a joint venture with Bunge (NYSE: BG  ) , is on track to begin operations in 2013. Once up and running, the plant is expected to produce 100,000 metric tons of sugar-oil annually.

According to UBS, this is only the beginning: "We expect long term offtake contracts with key customers such as Unilever, Dow, and Chevron (NYSE: CVX  ) to materialize as the capacity plans firm up." That's in addition to major government-based customers, such as America's own Department of Defense, which has bought 132,000 gallons of Solazyme-produced biofuel already, and hopes to use even more in the future to power the U.S. Navy's warships. Other customers include Boeing, which proved the concept of algae-based jetfuel in a test-flight run for United Airlines last year.

Ultimately, UBS expects "commercial scale" production of biofuels to evolve into a $200 billion market, on which Solazyme can reliably expect to earn "a 30%+ margin sustainably."

Biofuel dreams
That's a big vote of confidence for Solazyme shareholders, such as the Fool's own Alyce Lomax, who bought Solazyme for her Rising Star portfolio shortly after the May IPO, then bought it again in November.

Like Alyce, UBS is one of the top-performing analysts tracked on Motley Fool CAPS, ranking in the top 10% of investors, according to our data. And UBS has been especially successful in the oil, gas, and consumable fuels industry, where it's made more than 100 separate recommendations over the past six years (each carefully tracked on CAPS) and outperformed the market by a combined 456 percentage points on its oil industry picks.

And yes, Solazyme could one day number among UBS' winners, but I wouldn't bet on it.

Solazyme: Would you buy these numbers?
Let's take a short stroll through Solazyme's financials and I'll show you why not.

UBS may dream of 30%-plus margins at Solazyme, but so far the company's producing, well, a bit less than that. Earnings from operation margins are negative 141%, to be precise. Sales have been growing sprightly, quadrupling between 2009 and 2011, but so far it seems that the more biofuel Solazyme sells, the more money it loses:

  • $14 million lost in 2009.
  • $16 million lost in 2010.
  • Solazyme lost a whopping $54 million last year, and is on track to lose more than $63 million this year.

Similarly, free cash flow at the company is deeply in the red, with $58 million burnt over the past 12 months. And while it's true that Solazyme has enough cash in the bank to fund similar losses for about four more years before it needs to hit up its bankers (or its shareholders) for more cash, the trend doesn't look promising.

The bear case for alternative energy
Bad as all this sounds, it's not even the worst news for Solazyme investors. The really bad news is that no matter what Solazyme does to try and improve its situation, it remains at the mercy of the oil and gas market.

When oil prices are high, as they were last year and earlier this year, a "window" of opportunity seems to open for alternative energy plays like Solazyme. They take out loans, float IPOs, and rush to build factories to produce fuels alternative to oil. Meanwhile, though, the actual oil industry is busy fixing its own problems. High oil costs spur improvements in efficiency and declines in demand, which ultimately result in lower oil prices, often right around the time companies like Solazyme are trying to interest customers in their alternative fuel offering.

And what do we see today? Natural gas prices plumbing $2 depths. Oil prices dropping toward $80 a barrel. That's bad news for the profits at Chesapeake Energy (NYSE: CHK  ) and ExxonMobil (NYSE: XOM  ) , but at least those companies get to sell more natural gas and oil as lower prices spur demand for their products. Solazyme, meanwhile, gets stuck trying to sell something even more expensive as an alternative to oil and gas, just as they're beginning to look like cheap sources of energy.

Moral of the story: Kermit was right. It's not that easy being green.

So leave Solazyme to the speculators. There's a better way to make money in the oil patch, and you can find out all about it in our new report: "The Only Energy Stock You'll Ever Need." Download it for free right now.

Fool contributor Rich Smith holds no position in any company mentioned, but The Motley Fool owns shares of Chesapeake Energy and Solazyme. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy, Unilever, and Chevron.

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 (11) | Recommend This Article (5)

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 June 14, 2012, at 1:54 AM, prginww wrote:

    This is just another crappy article by Rich Smith. This guy should be fired for writing such garbage.

  • Report this Comment On June 14, 2012, at 12:54 PM, prginww wrote:

    SZYM is not a biofuels company - it's much, much more than that. I too am concerned about how quickly they're burning cash and agree that it's a good idea to keep a close eye on that trend, but basing any investment decision regarding this company on the general state of the biofuels industry is ridiculous.

  • Report this Comment On June 15, 2012, at 2:59 PM, prginww wrote:

    I'm in full agreement with seattle1115, Consider the currently small, but rapidly growing high end cosmetics line and the potential for food additives. No strong revenus yet but explosive potential.

  • Report this Comment On June 15, 2012, at 3:22 PM, prginww wrote:

    Wow, Rich. This is really bad analysis. I hope you don't write like this for all your articles.

    First of all, I like how you quote financial numbers as if they're actually representative of what to expect going forward. You conveniently leave out the fact that manufacturing capacity is currently at .... oh lets say ~ 3k metric tons as of this year. Never mind that the company is going to have capacity about 150k metric tones in late 2013. The funny thing is that most of SZYM's revenues are currently coming from research and aren't even tied to production results yet. And of current revenues that ARE tied to production? Oh yah, those product gross margins are in the range of just about 70%. Its not hard to imagine those product revenues are probably doing north of 40-50% in net margins.

    But these revenues aren't even tied to biofuels, you might contend? Yes you're right on that front! Because this company isn't even really about biofuels for some time, Rich!

    But nooooo..... this is BIOFUELS, thats what the company's known for, right Rich? it's got to be crap. But is it really? I like how you haven't once talked about how Solazyme isn't even going to target the non-commodity biofuels market and instead is going to produce much more highly valued blends. I also like how you continue to beat a dead horse about biofuels at all never mind that the majority of all production is going to chemicals, food, and cosmetics.

    I'm not even going to bother finishing the rest of my negative comment on how bad this article is. For an author who doesn't even get what the company does, you sure write about it a lot. It's just sad that you can spin things around to fit your own lack of research.

  • Report this Comment On June 15, 2012, at 3:44 PM, prginww wrote:

    What's with all the haters here?! According to their own website, Solazyme is indeed a biofuels company:

    "Solazyme is working to meet the world's growing demand for oil supply. Learn more about our breakthrough renewable oil technology platform here."

    Sure they are attempting to diversify into other areas like nutrition(?) and health sciences (??). Seems to me that they are just trying to figure out how to survive while they burn through all their cash.

    Go ahead and speculate on their "explosive potential" for future revenues. I think I will pass.

  • Report this Comment On June 15, 2012, at 3:55 PM, prginww wrote:

    Is this a joke? You're seriously using pre-revenue (for all intents and purposes) margins and free cash flow to determine that this company is going to struggle to hit their margins at full scale operations? Really!? This is a new foolish low for the Fools. I give this analysis a lower case "f".

  • Report this Comment On June 15, 2012, at 4:01 PM, prginww wrote:

    EnigmaDude...not all oil on this planet is used for fuel. Do you drive an extra virgin olive oil car?

  • Report this Comment On June 15, 2012, at 5:49 PM, prginww wrote:

    Like I said, Rich Smith should be fired for this piece of crap article.

  • Report this Comment On June 16, 2012, at 11:27 AM, prginww wrote:


    While biofuels is the ultimate goal with the lowest margin and highest volume business, it is also the goal that will take the longest to achieve due to higher amounts of manufacturing capacity to come online.

    Yet the advantage of this company over others in the biofuel arena, is that not only that it is a mere convenience to explore other markets, it's that these other markets are themselves yearning for what Solazyme can provide. Solazyme can customize their oil profiles to these industries and has thus far added value above a mere renewable replacement in every one of its products thus far delivered. When a company is providing products with additional value over mere replacements, its very difficult to continue to assert it's merely just another company trying to survive. The funny thing is that the company isn't doing this to just one market, its doing it to multiple industries.

    Therefore, one could speculate that they are struggling on the basis of numbers, but if you actually see whats really happening, the company is in full momentum in development and laying out the foundation for a large mfg capacity build out.

    Biofuels will one day be addressed, and in the present they are being only meagerly being addressed to continue making headwinds into those industries. But for now the company's focus is almost entirely in chemicals, food, and cosmetics for the moment as it can gain some of the highest margins for its efforts.

    Therefore, like so many people who have commented on this article, Mr Smith does no one any favor in misrepresenting its target company. He essentially uses revenues of a company who hasn't even started yet to justify his predictions of the future. And if you want to accept this as the truth that's your own perogative. I for one, am glad to see there are more rational minds out there.

  • Report this Comment On June 16, 2012, at 3:02 PM, prginww wrote:

    I love this crap analysis with no bearings. This will bring down the stock, since propaganda runs Wall Street. Creates another buying opportunity for me. I am long SZYM.

  • Report this Comment On June 20, 2012, at 6:21 PM, prginww wrote:

    Well, Rich, you may refer to me as a "speculator" but I consider myself as a "visionary". You give all kinds of vague statements that you don't actually support. Then you do say "One analyst, however, thinks it could soon become the big success story of 2012."

    Like it or not the DOD (Navy) can't be all wrong. You are a typical "live-for-today" like it is the end of the world person.

    Hey you talk about the disappointing IPO. Well shall we talk about Facebook? Oh, but then again, you will probably go out and post something on your FB page about my comment here.

    Just goes to show you that some people are not worth what they are being paid to do.

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