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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.

Is it time for Solazyme?
Shares of alternative energy play Solazyme (Nasdaq: SZYM  ) surged 7% in after-hours trading yesterday, after the biofuels maker announced third quarter "earnings" that featured no actual earnings at all. Reporting a $0.37 per share net loss, Solazyme managed to turn a small (4%) decrease in revenues into a pretty massive (54%) increase in quarterly losses. Regardless, the company seems to be retaining its fan base on Wall Street, as ace analyst Canaccord Genuity steps up to the plate and reiterates its "buy" rating on the stock.

Now, it's not all champagne and caviar -- or perhaps, biodiesel and algae -- for Solazyme investors. In the course of doubling down on Solazyme, Canaccord did ratchet back its price target on the stock to $10. Still, that's almost half of what the shares were selling for yesterday and, apparently, a big enough endorsement to get investors' attention this morning.

Profits? We don't need no stinking profits
What's got Canaccord all hot and bothered about Solazyme this morning, despite the underwhelming earnings? Surprisingly, for a banker, who you'd think would be obsessed with the concepts of profits and losses, Canaccord says, "We continue to find financial results to be less meaningful than progress vs. key milestones" at Solazyme.

So, in the absence of earnings numbers to crunch, what does the analyst focus on in re-upping its buy rating on the stock? "A new agreement with ADM (NYSE: ADM  ) in North ... and a framework for expansion of the Bunge (NYSE: BG  ) JV in Brazil." As Canaccord sees it, therefore, "all key milestones appear on-track."

Customers are still buying. The company has an agreement in place to sell biodiesel to Chevron (NYSE: CVX  ) for refining, and a letter of intent to sell to United Continental (NYSE: UAL  ) , as well. Management forecasts sales of ~$44M in 2012 and, while this is down significantly from prior forecasts of as much as $50 million, Solazyme should still book "~$8.3M" in sales in Q4. Meanwhile, "the balance sheet still remains firm, with cash/investments at $167M after burning ~$75 YTD."

In other words, while Solazyme may not be earning a profit yet, at least it's still selling stuff, and at least it's got enough money in the bank to keep on selling stuff for another six quarters or so (assuming a $100 million annual cash-burn rate).

Trouble in paradise
There are, however, a couple of problems with the modestly rosy view of Solazyme. First and foremost, Canaccord's estimated burn rate is about twice as high as the rate at which Solazyme was burning cash last year -- suggesting the situation is getting worse, not better, and that Solazyme's cash reserves may run out sooner than planned.

Second ... even if they don't, even if Solazyme does manage to stretch its cash out to last another six quarters, this may not be enough to save the stock. Fact is, the consensus on Wall Street is that Solazyme won't start earning profits before late 2015. This suggests that Solazyme could run out of cash, and needs to dilute shareholders with a new stock issuance, before it reaches breakeven.

Foolish takeaway
There is, of course, a chance that Solazyme can make it. That it can ratchet back capital spending toward more moderate 2011 levels, or capitalize on a boost in investor enthusiasm (and stock price) to issue shares at a price that will avoid excessive dilution. But management's cutting it awfully close.

Truth be told, if you're on the lookout for intriguing energy plays, you may be better off staying away from alt-energy entirely, and checking out the Motley Fool's report on 3 Stocks for $100 Oil instead. You can get free access to this special report by clicking here.


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 November 16, 2012, at 9:57 AM, Lachplesis wrote:

    SZYM has the disruptive technology that is proven to be scalable, the markets that dwarf its future production capacity for the next several decades, the market leaders as partners in their JVs, and a management team that always delivers on what's been promised so far.

    What the company doesn't have is a production capacity. It sells everything that it can make, and spends its cash reserve to build mass-scale production facilities.

    If you are a small shop operator that makes $100K a year, but can build a factory for $1M that guarantees that you will make $2M per year then why wouldn't you build that factory? Sure, while the factory is being build your revenues vs expenses will look scary, but investors don't just look at what has happened, they want to see at what can happen in the future.

    The future never looked so bright for SZYM.

  • Report this Comment On November 16, 2012, at 10:17 AM, lntwo wrote:

    Hate to quibble, but if you look at their partners you'll see that the lion's share of szym's production capacity is in the deals with Bunge, Rouqette, and ADM. imho, for the next 5 years or so, szym is not an energy commodity play but a soft commodities (food stuffs and chemicals) play.

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