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Buy, Sell, or Hold: Solazyme

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When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Solazyme (Nasdaq: SZYM  ) today, and see why you might want to buy, sell, or hold it.

Founded  in 2003, based in California, and with a market capitalization near $600 million, Solazyme is in the business of producing renewable oil, using technologies such as microalgae-powered fermentation. It also produces food ingredients and skin-care products with microalgae. Its stock has risen about 21% over the past year, but at a recent price near $10 per share, it's down considerably from its 52-week high of $16.31 .

One reason to consider buying into Solazyme is its business. Interest in alternative fuels has been growing in recent years, along with a desire to wean ourselves off fossil fuels. That's not enough for a stock-buying thesis, though, so read on.

The company is growing, which is a good thing. Its revenue has gone from $38 million in 2010 to $51  million over the past year. Its Soladiesel fuel has been approved  for commercial use by the Environmental Protection Agency (EPA), and it has been taking on projects and inking various partnership deals. Chevron (NYSE: CVX  ) has partnered with Solazyme, and United Continental (NYSE: UAL  ) has placed a large order  for jet fuel. Even the U.S. Navy has been testing the waters, with a $12 million  order late last year. Boeing (NYSE: BA  ) proved the viability of algae-based fuel with a test flight last year.

Through a partnership with Bunge (NYSE: BG  ) , Solazyme is building a large facility in Brazil to convert sugar into oil. Its food products are already for sale in Whole Foods Markets (Nasdaq: WFM  ) and GNC (NYSE: GNC  ) stores, and skin-care products can be found in J.C. Penney (NYSE: JCP  ) and Sephora stores.

In 2011, Solazyme was named America's Fastest Growing Manufacturing Company by Inc. Magazine and No. 1 in Biofuels Digest's list  of the "50 Hottest Companies in Bioenergy."

It's worth noting that Solazyme is much more than a fuel company, as it's pursuing different product lines with varying profitability potentials. That kind of diversification can be a good thing.

Solazyme's balance sheet  is another good thing, sporting more than $200 million in cash and little long-term debt.

The company has been bought in several of The Motley Fool analysts' real-money portfolios. Alyce Lomax, for example, bought shares for her socially responsible-investing-oriented portfolio.

Solazyme's very green business might be appealing, but it's important to remember that you need more than a great idea to make good money. The company has to be able to bring its offerings to market, and the market has to embrace them. Competition must be fought, and, ideally, competitive advantages established. Microalgae-based fuel may be a major product of the future, but it's not yet clear which companies will be long-term winners in the industry and when they'll turn profitable.

In the meantime, Solazyme is very promising, but also unprofitable. Still, that's to be expected with many young, dynamic companies. They need to invest heavily in their growth.

One concern is dilution, as the company's total shares outstanding have risen  from about 43 million in 2010 to 60 million recently. That kind of growth shrinks the value of existing shares, so interested investors should keep an eye on it.

Hold (off)
Given the reasons to buy or sell Solazyme, it's not unreasonable to decide to just hold off. You might want to wait for it to turn the corner into profitability, and perhaps for it to rack up several more big partnerships or contracts.

You might also take a look at other companies involved in alternative energies. Westport Innovations (Nasdaq: WPRT  ) , for example, is making vehicle engines that run on natural gas, while Clean Energy Fuels (Nasdaq: CLNE  ) is building a network of fueling stations for such vehicles. Neither may be profitable yet, but Westport's revenue has been growing by more than 30% annually over the past five years, while Clean Energy's has topped 20%.

The verdict
I'm going to pass on Solazyme at the moment, but it does intrigue me. Everyone's investment calculations are different, though, so do your own digging and see what you think. Remember that there are plenty of other compelling stocks out there.

The movement toward alternative energy is gaining momentum. One potential opportunity in this field is Clean Energy Fuels, which focuses its natural gas efforts primarily on trucking and fleets. It is poised to make a big impact on an essential industry. Read all about Clean Energy Fuels in our brand new report. Just click here to get started.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, has no positions in the stocks mentioned above. The Motley Fool owns shares of Clean Energy Fuels, Solazyme, Whole Foods Market, and Westport Innovations. Motley Fool newsletter services recommend Chevron, Clean Energy Fuels, Westport Innovations, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 October 14, 2012, at 6:49 PM, Cake123xyz wrote:

    Author remains fuel-centric & uses terrible associations without touching up on the real winning advantages of what the company's doing. Tailored oils? Yeah, not even mentioned.

    Also dwells on big scary dilution #'s from 2010 even though the company IPO'd in 2011. Kind of an important fact don't you think?

    Next time you write about this company, it might be a good idea to consider the revenue that's about to come online in a very big way. Company is building production capacity. The revenues listed aren't even truly related to product revenues yet. Kind of hard when the commercialization plants are under construction as we speak.

    Solazyme is about to take the market by storm and the writers at Motley Fool keep dwelling on useless opinions they have concerning 1st gen biofuels & information they can find off of stock screeners.

  • Report this Comment On October 14, 2012, at 7:10 PM, lanceim59 wrote:

    I agree with the previous post 100%. These Fools write about useless information that everyone already knows or information that is false. The credibility of this site has reached the bottom of the barrel due to incompetent authors.

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