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.
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%.
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.