Does a New Milestone Make Amyris a Buy?

Amyris (AMRS) recently reached a major production milestone at its farnesene plant in Brazil. In meeting an increased production rate of 1 million liters of farnesene in 45 days, it has demonstrated the ability to meet high output standards that were placed as a condition for the purchase of additional promissory notes from two leading stockholders. While this is encouraging news for investors, Amyris is still yet to turn a quarterly profit. Does this increased production make Amyris a buy?

Comparing Khosla Ventures
Vinod Khosla, the primary financier behind Amyris (and several other bio-product ventures) has a strong record of bringing start-up companies successfully to the IPO stage, but none of these companies, including KiOR (NASDAQ: KIOR) and Gevo, are yet to make a memorable impact following their IPO. Mascoma, another Khosla-funded company, has had similar difficulties as it walks a fine line between private and public, and recently withdrew from a planned IPO launch.

Amyris needs to break out of the seeming lull in biofuel interest from investors, and demonstrating its ability to meet and beat production expectations should help. However, investors haven't always responded with the enthusiasm that might be anticipated from such an achievement.

In September, KiOR announced an expansion project that planned to double production capacity and according to its own projections lead to profitability by 2015. Shares of KiOR jumped a remarkable 58% on the day of the press release. Since then, shares have rescinded but have retained a notable gain since the announcement. Unfortunately, the other half of the story is that KiOR is still down 21% year to date.  Similar positive news from the Gevo opening of a demonstration-scale plant failed to yield a sustainable jump.

Good news in the Khosla-funded world of bio-based products has yet to yield sustained value for KiOR and Gevo, and Amyris may suffer the same troubles.

What production results mean
While positive production results have yet to dynamically influence the perceived value of these Khosla companies, these achievements should not be disregarded. The production milestone achieved by Amyris at its farnesene plant goes beyond transferring the technology from lab-scale to production-scale, as it confirms to some extent the efficiency of the plant operations as well.

Perhaps the biggest benefit of increased production comes back to fundamental economics. Increased economies of scale will work to Amyris' advantage, as it continues to do for FutureFuel (FF 3.87%). FutureFuel has demonstrated an ability to succeed in the biofuels market, even without tax credits, by utilizing economies of scale on their consumables. As production numbers, and in turn earnings, continue to impress, FutureFuel remains a solid and more reliable play in biofuels. Amyris has a great start and is heading in the right direction, but still hasn't quite passed the all-important threshold.

The missing piece
Included in KiOR's press release were projections to turn a profit by 2015, an achievement that is yet to be realized by most biofuel companies. Likewise, FutureFuel has been operating at a profit for over half a decade, and even pays a dividend.

Amyris has met substantial production goals, but the major motivation in doing so was essentially to procure more access to debt. Until Amyris (or KiOR and other bio-product companies for that matter) are able to turn a quarterly profit, press releases and ribbon-cutting ceremonies will be worth little more than small jumps in stock prices. As has been seen, these jumps don't last so long as there is no sustainable profit.

If and only if these companies are able to consistently demonstrate the capacity to make biofuels a profitable venture, as has been seen by the likes of FutureFuel (FF 3.87%)and Renewable Energy Group, will they transition from speculative buys to stocks with long-term value.

While production milestones make for great press releases and do indicate a growing company, Amyris still lacks profit and remains a bit too risky to buy with long-term goals in mind.