Solazyme (NASDAQ: SZYM ) 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.
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