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What the Heck’s Wrong With Solazyme?

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Biofuels stock Solazyme (Nasdaq: SZYM  ) has gotten really beaten down over the last year. Stocks do all kinds of things for all kinds of reasons -- and stock moves are all too frequently anything but logical -- but it seems like for this green company's shares, it's been mostly downhill lately despite sunny tidings.

Granted, Solazyme isn't a profitable company yet. That's not surprising and certainly not news; it's been busy creating alternative oil using plant-based sugars and algae. In its recent third-quarter report, Solazyme posted a net loss of $22.5 million, wider that the $14.1 million net loss it reported in the comparable quarter last year. Revenue dipped to $8.6 million from $8.9 million the year before.

What is surprising is how much good news investors seem to have brutally overlooked. For example, Solzayme announced strategic collaboration, marketing, and manufacturing agreements with Archer Daniels Midland (NYSE: ADM  ) . Its joint venture with a unit of Bunge Limited (NYSE: BG  ) is expanding, with a goal to increase its production capacity to 300,000 metric tons by 2016; it's also embarking on the development of tailored food oils in Brazil.

Meanwhile, despite the fact that biofuels are hardly mainstream, sales of Solazyme's Algenist skin care line have doubled year-to-date to $12 million. It's nice to have a marketable product -- not to mention an ancillary source of revenue -- right off the bat.

It's not easy being green
I started out calling Solazyme a "biofuels" stock, and a "green" company, but that may be exactly the key to the reality disconnect about this stock. What many investors may be missing is how much growth Solazyme can garner from other avenues such as Algenist and other personal care products, as well as food and confectionary oils.

Some companies that are considered peers, like Amyris (Nasdaq: AMRS  ) and Gevo (Nasdaq: GEVO  ) , are having major problems transitioning from biofuel start-ups to commercial enterprises that can make money. Both companies have recently had difficulties with production and, of course, have experienced stock price drubbings.

Although Amyris, which is partly owned by oil giant Total (NYSE: TOT  ) , reported a narrower loss last quarter, its revenue plunged 47% to $19.1 million; it had to close two of its three plants when it encountered difficulties with fermentation yields. Gevo's even scarier; last quarter, its revenue dropped to just $600,000 from $17.5 million the year before.

I'm glad to have a stake in Solazyme as opposed to many companies that are considered "comparable." Solazyme's simply way ahead of the crowd.

There's other positive news that hasn't seemed to make a dent in current bearishness. The U.S. Senate recently rejected restrictions in its defense policy that would have limited the military's role in the development and purchase of biofuels for jet and warplanes.

Another positive development is Solazyme's testing of "Soladiesel" for normal consumer vehicles at four spots in the San Francisco area. The experiment is in partnership with Propel Fuels, which builds "Clean Fuel Points" in traditional gas stations according to green specs, and will last for one month. The fuel is 20% algal and 80% petroleum.

Patience is the key
Solazyme remains risky in the grand scheme of things, but it's less risky than many of the other alternative energy and biofuel plays. Solazyme's also got a heck of a lot of first-mover advantage given its long-running relationships with the military and other important partners.

I bought shares of Solazyme for the Prosocial Portfolio I'm managing for not once but twice, putting some clean energy into the socially responsible collection of stocks I've been building. I've also bought into Solazyme personally.

So far, Solazyme's stock performance could be called disappointing by some. No matter: I have high hopes for Solazyme's continued progress in the future. It remains an important, innovative company that's looking to the future, and even if many investors are unimpressed right now, I still believe patience will pay off for those of us who are willing to give it time.

If you're on the lookout for some currently intriguing energy plays, check out The Motley Fool's "3 Stocks for $100 Oil." You can get free access to this special report by clicking here.

Read/Post Comments (4) | Recommend This Article (6)

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 29, 2012, at 7:43 PM, seattle1115 wrote:

    I think you nailed it - the reason SZYM shares are depressed is because everyone thinks of them as a biofuel play. Frankly, I'm probably more excited by their potential impact on the food and nutrition industry. Find a suitable replacement for palm oil, and they can write their own check.

  • Report this Comment On December 01, 2012, at 5:17 AM, djknow wrote:

    There was a a very bearish article (Seeking Alpha, Solazyme: In The Wrong Place At The Wrong Time, 10/31 - qineqt) concluding with:

    'For all the reasons listed above, we would suggest investors avoid taking any position in the stock.'

    Then reader comments took off claiming SZYM oil production capability is a hoax. The short sellers came out in force taking turns slamming the company. The stock priced dropped nearly 25% over the next 4 weeks. A great buy opportunity!! Without any other negative news (actually all were good), I have to attribute the article/comments for the movement. That and the faint of heart lemming investors who bought into it.

    This is a long position of mine and I'm confidently expecting great things; worthy of bragging about.

    I have disagreed with the company trying to compete with big oil in any way; to fuel planes and such, but instead focus on their higher margin areas where others really can't compete. Then again, they have stayed in a good position to get DOD bucks and fortunately that now looks to be a certainty.

    If you can take a little risk with a big upside, then I suggest looking deeper into SZYM and see what I do.

  • Report this Comment On December 01, 2012, at 7:32 PM, stillwater9999 wrote:

    This company lacks focus. They are trying to be a cosmetic company and at the same time compete with Exxon in producing fuel. There are too many initiatives, and too many employees. I would never invest in a company with no real sales or profits unless I had very specific knowledge. The average investor cannot evaluate the patents or the prospects. There are many great companies to invest in with real financials. Choose those instead.

  • Report this Comment On December 01, 2012, at 9:44 PM, seattle1115 wrote:

    stillwater9999 wrote: "This company lacks focus."

    I disagree. The company has a laser focus, clearly set forth in the first sentence of pretty much every corporate communication: Solazyme makes oil. It doesn't matter what kind of oil, or how the customer intends to use it - the bottom line is that the promise of Solazyme's technology is that they can make oil that meets the provided specifications. You see food, cosmetics, fuel, and so forth as completely different things, but the company just sees oil. Yes, it's a speculative play. If you're looking for a company that can be valued by conventional means, this isn't the investment for you. But - if you believe that the company is making progress toward they're stated goal, it's a risk that may be worth taking.

    I look at it this way: I've invested in some great companies, some companies that do good work and, I hope, make me some money. Not a one of them, however, could theoretically become the biggest company in the world. Solazyme, however, could be just that, if they're able to make good on their technological promise. I'm willing to make some room in my portfolio for a company like that.

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