4 Reasons to Sell Solazyme

Solazyme (NASDAQ: TVIA  ) became a favorite of investors soon after its IPO and has remained in the top spot among its publicly traded peers. There are good reasons for the excitement surrounding the renewable oils producer, but no investment comes without risk. That is especially true for young industrial biotechnology companies that require boatloads of cash to reach maturity. Here are several reasons to remain cautious about Solazyme.

1. Expensive capacity additions looming
Solazyme will have 125,000 metric tons of production capacity by mid-2014. That is no drop in the bucket, but it shows there is a long way to go to hit the internal goal of having 550,000 metric tons installed by the end of 2015.

Perhaps more troublesome is the fact that even after expanding the capacity of current biorefineries to their maximum levels Solazyme will wield just 250,000 metric tons of renewable oil power. An expanded collaboration with Bunge (NYSE: BG  ) will add an additional 200,000 metric tons to that figure, but the facilities adding the capacity have yet to be built. While Solazyme is sitting on nearly $260 million in cash and cash equivalents to start 2013, more funding may be needed for the company to contribute its half to the joint venture with Bunge and build another 100,000 metric tons of completely new capacity.

2. Supply chain sensitivity
When asked about a timeline for partnership off-take agreements on the most recent conference call, co-founder and CEO Jonathan Wolfson let investors in on a growing pain encountered during negotiations with partners and potential partners. Many investors may not think about it – I sure didn't – but companies can spend many years and countless dollars growing and nurturing relationships with suppliers and customers. Wolfson explained that while potential partners are excited about Solazyme's disruptive oils they are also sensitive to rocking the boats shared with current, more traditional suppliers.

Since Solazyme won't initially be able to completely replace a potential partner's supplier for any product it will have to work that much harder to get into the supply chain. This doesn't render the company's renewable oils obsolete by any means, but it does offer an inside look at the unobvious obstacles facing the company and its peers.

3. Synthetic alcohols challenging palm oils
As if competing with more established palm oil supply chains wasn't difficult enough, Solazyme will also have to compete with synthetically sourced oleochemical products. Just a few years ago the price of palm oil was considered to be insulated from swings in petroleum prices. Unfortunately, that changed when various governments began awarding credits for biofuels sourced "sustainably" from palm oil. Consider that the correlation between palm oil and petroleum prices has grown from 0.174 between 2003 and 2007 to 0.526 over the last five years.  

What does this mean for Solazyme? Well, its renewable oils will still be eyed for their high sustainability. The company could even turn it into an advantage if it can keep costs down. But with companies around the globe switching palm oil out of their supply chains for synthetic feedstocks there is no doubt that Solazyme faces a new group of synthetic competition that is often overlooked.  

4. Annual losses to continue
This drawback can be applied to most companies in the industry – even the mighty Solazyme. The company admitted that, although it expects to be cash flow positive by 2014, it foresees annual losses continuing for "several years." The expensive build-outs of biorefineries, the ramp-ups to full capacity after commissioning production, and the commercialization of its product portfolio will all contribute to the losses.

Foolish bottom line
This is in no way a comprehensive list of the risks facing Solazyme, nor does it necessarily offset the growing number of reasons that support the case for continued growth. We Fools simply believe that investors need to consider both the risk and reward sides of each investment, while also knowing which information to look for when researching a potential investment. What do you think of the risks facing Solazyme's renewable oils? Let me know in the comments section below.

If you don't want to wait for 2016 or beyond to see annual profits from Solazyme's biofuels, 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 (16) | Recommend This Article (10)

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 March 05, 2013, at 12:11 PM, GUVF wrote:

    Some valid points here but the first point you make is like the people who claim they don't want a salary increase because they'll have to pay more taxes as a result.

  • Report this Comment On March 05, 2013, at 12:25 PM, TMFBlacknGold wrote:


    Just illustrating the point that it will be easy to use the several hundred million dollars on the books. There could be a few more years of pain before investors see any huge gains.

    Thanks for reading and Fool on!


  • Report this Comment On March 05, 2013, at 12:33 PM, Lachplesis wrote:

    1. Does SZYM trade at a price that already considers output 250,000 mt of production capacity? I don't think so. So what is the reason to indicate that SZYM is a good candidate to sell at current valuations? Is it overprices based on what is currently known?

    2. If SZYM is able to manufacture drop-in substitutes for commodities then why is there a concern about supply chains?

    Can't they just dump them on the Chicago Mercantile Exchange, sell them for market price, which still guarantees healthy margins and let the buyer worry about the end consumers?

    3. SZYM has the means to switch output oil types within a very short time span. This is a major security advantage against unexpected prolonged price depression of a specific commodity. In the meantime they can just make something that sells with higher margins.

    4. Expected losses are already reflected in current prices, and there's little indication at the moment that additional issues should depress the stock price further. Therefore, if one didn't sell the stock last year what is the reason to sell today?

  • Report this Comment On March 05, 2013, at 12:39 PM, TMFBlacknGold wrote:


    "SZYM has the means to switch output oil types within a very short time span."

    That contradicts the "oils for $1,000 per metric ton in a built-for-purpose facility" argument in the foot, doesn't it? Increased flexibility will come with increased costs until the company can really grow its production capacity. Just something to chew on.

    The supply chain concerns I illustrate above have more to do with the human element of supply agreements and less with the in-spec nature of the oils themselves.

    Fool on!


  • Report this Comment On March 05, 2013, at 2:02 PM, tfaby3 wrote:

    Maxx is long GEVO, CDXS, and AMRS. It makes sense for him to spend so much time on SZYM. He's lost money on all his longs bio-oil plays, btw,

  • Report this Comment On March 05, 2013, at 2:51 PM, seattle1115 wrote:

    Thank you for this article. I'm quite bullish on the company, which is exactly why I look for well-reasoned statements of the contrary opinion. Most of the stuff I read which is anything less than breathlessly optimistic about the company seems superficial and analytically dubious, but this article (and others like it you've written) are enormously helpful in checking my potentially irrational exuberance. I'm especially interested in your third point because I believe that sustainably produced nutritional products is key to the company's long-term success, and I hope you'll write more about this topic soon.

  • Report this Comment On March 05, 2013, at 3:23 PM, 275GTB4 wrote:

    once the plants are producing at scale, which they will be, we know this already....

    .and margins are what has been projected, this is the unknown.....all announced capacity will be priced into the stock.

    plants cost bites dog...who cares!?

    as for supply chain do know who Mitsui is, right?

    supply chain ninjas...

  • Report this Comment On March 05, 2013, at 6:34 PM, EmFetch267 wrote:

    Are you done being a wolf in sheep's clothing, Maxx? I like how your subtle jabs at the company while you were feigning bullishness have now turned to overt foolishness.

    Why do you even write about this company when it's clear your real frustrations are for your blown calls on GEVO, AMRS, and CDXS? Maybe you should stop pretending to be someone who understands this company. The more you try, the more you just sound like someone who just can't get it right in this space.

  • Report this Comment On March 05, 2013, at 6:41 PM, EmFetch267 wrote:

    "That contradicts the "oils for $1,000 per metric ton in a built-for-purpose facility" argument in the foot, doesn't it? Increased flexibility will come with increased costs until the company can really grow its production capacity. Just something to chew on."

    You're right. The company is making an idiotic move because that increased flexibility is going to cost more than the the benefit of having the flexibility.....

    When you offer more value, customers pay for that value. Just something to chew on.

  • Report this Comment On March 05, 2013, at 7:01 PM, spiriton wrote:

    Maxxwell, Nice to see you firming up a reasoned skepticism to Solazyme. Much more beneficial to read than some of your responses over on SA. In anycase, keep up the good counter arguments as they cause one to flex the mind. I wish to point out that your article did not, however, address the implicit tenet of your title -- it is time to "Sell Solazyme". Caution entering a position is vastly different than establishing cause to sell. You reasoned to the former, but left the latter without support.

  • Report this Comment On March 05, 2013, at 7:08 PM, TMFBlacknGold wrote:


    Again, this article is but a small piece in a series on Solazyme (as was the "3 Reasons to Buy" article). I'm long Codexis, drank the KoolAid on Amyris a bit early, and have never followed Gevo in any capacity.

    Tell me though, how is Solazyme's share performance to date any different? I do believe I cautioned repeatedly against its valuation at $15 per share last year. Funny how no one likes to point that out.

    Thanks for your continued support and Fool on!


  • Report this Comment On March 05, 2013, at 7:24 PM, TMFBlacknGold wrote:


    Thank you. I'm not sure I responded to your comment on my last article, but I do appreciate you taking some time to demonstrate your support.

    I think you are right to be optimistic about Solazyme - I just hope investors give equal thought to the risks involved. Unfortunately, I fear that is generally not the case. The point of my seemingly pessimistic views on the company is to pull investors back to the middle ground.

    I have nothing against the company, but I do get tired of the bullishness based on loose generalities of other writers.

    Fool on!


  • Report this Comment On March 05, 2013, at 8:58 PM, Cake123xyz wrote:

    Maxxwellllllll! Don't worry, I know I remember your $15 call! You couldn't stop playing it up! Wait, you STILL can't. Must feel good not to be bullish on development companies like you pumped up earlier on huh?

    But you also forgot to tell your readers about the $6.45 bottom! WHYYY NOT?? Your readers want to profit, not lose their money with your bearish bashing.

    Why are you pretending to be a bull now? Or wait, is it a bear now? I'm all confused by you....

    But hey! I'm just giving you some hard knocks. The shorts need a champion such as yourself. They've been buying it up thus far... 26% short as the price continues to rise! Way to go, superstar!

    Just in case you're really buying up what you spit out, you might want to remember to cover soon. (just in case you're short & didn't want to tell everyone). Not everything is based on fun theories such as the ones you like to believe in. Growth has a price that isn't being accounted for here. But hey, we got you on record for your sell-happy ideas.

    Just don't pretend like you actually believed in this company when it begins to pop.

  • Report this Comment On March 05, 2013, at 9:27 PM, EmFetch267 wrote:


    You might want to learn what sarcasm is if you really thought I was agreeing with you in my last comment.

    For your article:

    1) Trying to stir up fear? Let us scare people about money requirements - even though the plants already under construction haven't really cost that much at all (250,000 tons for less than $50 million of Solazyme's cash) and cash flows from these plants will help further future growth. Debt-financing, fool. It works.

    2) Tell me you realize how big these companies are right? The reason Solazyme is not replacing these suppliers right away is because they do not have the capacity to replace them... yet.

    Why would a company want to risk a theoretical 90% of their operations when Solazyme can only provide 10%? Problems getting into the supply chain? That doesn't seem fair. These large companies are paying for development of products they actually want.

    3) Synthetics? The general trend of the target oils are still going up, and this is before we talk about things such as plastic additives and the other products yet to be detailed. The variety is the company's strength. Too much farnesene going to your head? One-trick ponies aren't going to last in this space when the markets decide to wobble.

    4) Ran out of ideas? You really wanted to throw the "not-making-money" fear out there again? Ok, I'll play along. These big plants coming online probably aren't worth anything & couldn't generate squat.

  • Report this Comment On March 05, 2013, at 9:40 PM, EmFetch267 wrote:


    Sorry I am being mean again

    I do stand by the points I raise but your writing style is getting to me

    Keep fooling TMFBlacknGold. It works on some. bye.

  • Report this Comment On March 05, 2013, at 10:03 PM, Cake123xyz wrote:

    @seattle: There's plenty to be bearish about in the scale-up risk - that is all that is left! Maxxwelllll is just writing up scare-tactics! Did he write about the unknown unknowns yet? He should. It could happen!

    @Lechplesis: Really good points!

    @EmFetch267: Also good points! How do you know that they can only provide 10% though (or some other thrown-out figure)? I would not be surprised if they could cover all of a single supplier depending on how big the supplier is. Good job with the other thoughts

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