Solazyme Is Planting Itself for Success

Watching a small-cap company come into its own is like watching a plant grow. As investors, we provide the nutrients to help it grow, hoping that the seed of an idea takes root. If we're lucky, that company will grow and will start to bear fruit in the form of shareholder value. Obviously, not all of these companies will take root, but even the ones that do take time to go from seedling to harvest. This is where many investors in Solazyme (NASDAQ: SZYM  ) are right now, waiting for a seedling to bear fruit.

Let's take a quick look at what's going on at Solazyme and when we can expect this company to start bearing shareholder value.

The wait is the hardest part
Solazyme's projects are a botanist's dream. This is a company that uses algae to produce a wide variety of products ranging from engine lubricants to jet fuel and skin products. Its efforts have garnered lots of attention from a wide array of potential partners. While there are several consumer-related ideas the company is pursuing, some of its more interesting projects involve working with the U.S. government, as the departments of Defense and Energy have both participated in research projects involving the production and use of biodiesel created from algal oils. The DOD hopes that these oils could be used as a replacement fuel for its diesel-powered naval vessels. 

With this wide range of products, there is a lot of potential. Based on the current products Solazyme is working on, the company estimates a possible market in the range of $10.4 billion to $14.5 billion. One of its first products that has made it to market is the skin-care product Algenist. Product revenue for the anti-aging skin products has nearly tripled year over year, and it generated more than $16 million for the company throughout 2012.

Before we get ahead of ourselves, though, let's keep the company's progress in perspective. Three of its joint venture projects are still in the development phase and won't generate any revenue until the beginning of 2014. One of the major projects to ramp up at that time is the renewable-fuels joint venture with Bunge Limited (NYSE: BG  ) . Their new facility will produce up to 300,000 metric tons of renewable fuel.

On the other hand, there are some very strong indicators for this company. Not only has it secured enough financing through 2014, but it also has backing from major companies through those joint ventures. Along with Bunge, Solazyme has also entered into partnerships with Chevron  (NYSE: CVX  ) , Dow Chemical  (NYSE: DOW  ) , and Unilever to develop renewable products from algal oils. If these large companies all have a stake in Solazyme's success, then surely there's potential in the company's ideas.

The company's two largest threats are its competitors, and low energy prices. Amyris  (NASDAQ: AMRS  ) is its most direct competitor that also offers a wide range of offerings and products from natural byrpduct oils. The company has developed a method that uses microbes such as yeast instead of algae to synthesize oils. Some may also consider Rentech  (NASDAQ: RTK  ) a direct competitor, but its finished products are more fuel related and less diverse than Solazyme's.  

A much greater threat to Solazyme in the near term is energy prices. The low cost of both natural gas and oil will make it difficult for the company to sell into the alternative-fuels markets if traditional fuel prices make the switching costs not commercially viable.

What a Fool believes
Solazyme investors need patience. It's best to look at the Algenist products as the first bud on a young plant. They're a foreshadowing of things to come, and they'll help slow the cash burn, but they're still not a significant contribution. 

Early 2014 will be a strong indicator of the company's success. Once customers get to see the types of offerings available, we'll have a clearer picture of the market demand the company can expect. Even if these products do look promising to consumers, though, it will probably still be a long time until the company can realize a significant fraction of that potential market. 

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Read/Post Comments (3) | Recommend This Article (7)

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 February 26, 2013, at 2:29 PM, Lachplesis wrote:

    MF contributors are slowly beginning to understand what Solazyme as a company is about. However, the factual errors are generally still outnumber the useful content in the articles.

    First of all SZYM is about oils and not about the end products. Their JVs are about the end products.

    Secondly, the following assessment completely misses the mark: "The company's two largest threats are its competitors, and low energy prices."

    Their low-cap competitors are irrelevant at this stage of the game because target markets measure in billions and trillions. There's plenty of space in the pond for all these new little fishes.

    Low energy prices are also irrelevant to SZYM because they make oils that don't sell for around $100 a barrel, but instead for many multiples of that price. Therefore, even if oil goes back to $60/b, then SZYM can still sell its oils profitably.

    In reality, the major risks to this company can be listed as:

    a. delays with regulatory approvals to their food-related JV product items in EU that can delay profitability and lower margins

    b. delays with bringing planned manufacturing capacities online in Brazil, France and USA

    c. unexpected price spike of their current primary feedstock - sugar

    d. any potential issues with scalability, even though they were able to confirm no such issues with their test runs at ADM plant.

    MF, you're getting closer but much more research is still required on your part to claim that you understand this company.

  • Report this Comment On February 26, 2013, at 4:27 PM, TMFBlacknGold wrote:

    @Lachplesis

    I wouldn't say energy prices don't matter. Although Solazyme's oils are seen as an alternative to palm oils, many companies are substituting synthetic fatty alcohols in their supply chain. The truth is, the correlation between palm oil and petroleum has been increasing at an incredible rate over the last few years.

    In that regard, energy prices are more of an indirect threat to the company because it now has to fight synthetic oleochemical feedstocks as well as "sustainable" palm. Keep in mind that synthetic feedstock is ethylene, which is incredibly attractive in the United States right now thanks to cheap natural gas.

    Cheaper energy prices also mean the company will garner close to breakeven for each metric ton of jet fuel and diesel it sells - and that's if the company can eventually get product costs down to $1,000 per metric ton.

    Also, the test runs at Clinton (ADM) were two partial test runs that ended after fermentation. That means the company has yet to run even one complete end-to-end batch that includes downstream and upstream.

    --Maxxwell

  • Report this Comment On February 26, 2013, at 9:02 PM, TMFBlacknGold wrote:

    Also note that the new Bunge facility will not produce 300,000 metric tons per year. The expansion agreement signed late last year calls for a total of 300,000 metric tons of production capacity at select Bunge facilities worldwide (including U.S.) - meaning the two companies will have to fund new facilities accordingly. I'm not sure how much the current 100,000 metric ton facility can be expanded to, but I suppose it is possible for it to absorb some of the additional 200,000 metric tons.

    --Maxxwell

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