Investors love companies that disrupt the status quo and have the potential to deliver high growth to shareholders for many years into the future. Industrial biotech company Solazyme (NASDAQ: SZYM) certainly fits the bill, with its renewable oils platform capable of creating specialty chemicals, nutritionals, cosmetics, fuels, and more. The company is uniquely positioned to tap into the corporate world's increased focus on sustainability and attract investments from the biggest players in a multitude of industries.

Petri dishes of microalgae at a Solazyme research laboratory. Source: Solazyme

Nonetheless, a lot of misconceptions exist about the near-term direction of Solazyme and the timeline on which it will be able to meet its goals. Its growth is undeniable, but silky smooth execution on the road to full-scale commercial production is far from guaranteed. Therefore, I've attempted to provide clarification on three of the most common misconceptions about the company and redirect the focus of investors to better align with realistic expectations.

Solazyme doesn't need to scale to profit or execute its business plan. Additionally, the company will begin to hit its target margins in 2014.
This is a clever argument used to dismiss risks associated with ramp-up, but it isn't true. It is crucial to operate the largest fermenters possible to minimize costs associated with logistics, transportation, input, equipment, construction, and overhead. Perhaps the company states it best: "We will not succeed if we cannot maintain or decrease our production costs and effectively scale our technology and manufacturing processes."  

Solazyme has stated that it believes it needs to reproduce its process in 625,000-liter fermenters to achieve maximum margins in each target market (down from 750,000-liter tanks estimated at the time of its IPO). Solazyme will use its first commercial-scale facility in Moema, Brazil -- built with partner Bunge (NYSE: BG) -- to attempt to achieve steady state operations in 500,000-liter fermenters for the first time. Similarly sized fermenters will be employed at its second commercial-scale facility in Clinton, Iowa, currently being built with partner Archer Daniels Midland (NYSE: ADM). Essentially, neither facility will be optimized to achieve the margins in the target markets below, although they should come awfully close:

 

Fuels and Chemicals

Nutrition

Skin and Personal Care

Target average selling price*

>$2,000

>$2,500

---

Target gross margin

>30%

>40%

>60%

Source: Solazyme *per metric ton

Second, neither Moema nor Clinton will achieve their maximum margins until nameplate capacity is reached in mid-2015 and late-2015, respectively. So don't freak out if financials from the first and second quarters next year don't align with the margins above. Can Solazyme scale down its ambitions if 500,000-liter fermenters don't work? Absolutely, but it would deal a blow to revenue and margins, especially since the largest-volume bioreactors operated at steady state to date have been 128,000 liters.

Investors should instead focus on: Successfully reaching commercial-scale operations has proven difficult for the entire industry, but I'm cautiously optimistic Solazyme will be able to cross the hurdle, thanks in large part to its demonstration-scale facility at Peoria. I'm still not convinced everything will go smoothly, however. Investors focused on margins should be on the lookout for announcements concerning ramp-up progress at Moema and Clinton in the coming quarters, which will guide margins for each facility. There's also the eventual inevitability that margins will be improved with new, more robust microalgae strains. Additionally, future facilities will use knowledge gained at the first two commercial facilities to make the leap to the next size of fermenters -- further improving profitability.

Production of nutritional products will drive Solazyme's growth in the near term.
Management stated it would attempt to accelerate the commercialization of nutritional products after the company's nutritional joint venture with Roquette was dissolved earlier this year. In addition to exploring the possibility of installing the processing equipment required for such products at Moema and Clinton, Solazyme is converting the 1,820 metric ton (MT) Peoria facility to produce nutritional products beginning in early 2014. While production and selling prices will be affected by a ramp-up period, average selling prices are expected to eventually hit and exceed $5,000 per MT. Even assuming Peoria produces 1,820 MT of product at those prices next year, sales would amount to just $9.1 million -- a small contribution to the overall production and revenue picture.

Investors should instead focus on: The key drivers to Solazyme's growth will be target markets with high volumes and moderately high selling prices. Finding the right product mix to maximize revenue growth is the tricky part. Cosmetics are incredibly valuable, but the market doesn't support high volumes. Nutritional products have a larger market, but the company has yet to develop strong interest in its portfolio, and expanding production at larger facilities is not guaranteed in the short term. Investors should be on the lookout for commercial sales agreements for lauric and oleic oil profiles, which have a combined annual market size greater than 4 million MT and selling prices as high as $3,000 per MT. If you're focused on nutritional products, then be on the lookout for the construction of a dedicated facility in the coming quarters and years.

Solazyme will be able to convert waste streams from manufacturing facilities into value-added revenue streams in the near-term.
This will be an important long-term goal for the company and could drastically improve the margins achieved in each target market -- reaching heights even higher than those in the table above. The hope is that Solazyme will be able to convert algal biomass created in its process into additional products. Unfortunately, commercializing waste streams will be expensive, competitive, and simply not an early focus for the company.

A patent application published earlier this summer describes Solazyme's intention to eventually develop microalgae biomass into thermoplastics, paper, adsorbants, and absorbants. It doesn't make much sense for the company to throw scarce resources at developing such products, nor does a viable commercial partner seem to have jumped at the opportunity. Why not? Each product is entrenched in a highly competitive market that isn't favorable for smaller, marginal players to enter. Consider the pulp and paper industry, which ironically has large operations in Brazil thanks to its massive eucalyptus plantations.

Procter & Gamble's largest North American manufacturing facility in Mehoopany, PA sources eucalyptus pulp from the South American market. Image source: P&G

While larger companies can afford to ship pulp around the world, many mills are swimming in locally sourced pulp. In fact, the industry has been hammered by incredibly low margins in recent years, which has forced many mills in Canada, Upstate New York, and the Pacific Northwest to close their doors. Solazyme would simply not be able to produce enough waste algal biomass to be a worthwhile partner for a major paper company anytime soon. The same would likely apply to additional waste stream products.

Investors should instead focus on: Solazyme and ADM have actually stated that Clinton will have an initial nameplate capacity of 20,000 MT of renewable oils or dried biomass equivalent. Should Solazyme not fill the capacity with oils, it may be forced to explore these offshoot revenue streams sooner rather than later or sell biomass as animal feed and other products that require minimal processing. I'm not sure if that's necessarily a great thing for margins (traditionally, biomass is at the bottom of the gross margin chain), but it would aid the company in commercializing waste streams at all of its locations. 

Foolish bottom line
At the end of the day investors should be focused on the long-term growth potential of Solazyme. However, the next several quarters will be absolutely critical in dictating the path the company takes in realizing its potential. If it, too, slips in achieving commercial-scale operations on the timeline and at the volumes promised then certain longer term goals could change dramatically or be put on hold altogether. I am still looking to begin a position before the end of the year, but I will play it by ear before building the position substantially. Next week we'll look at three incorrect assertions from Solazyme bears and attempt to redirect the bearish conversation to facts. 

Be a bull on the stock market
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, his CAPS page, or follow him on Twitter @BlacknGoldFool to keep up with his writing on biopharmaceuticals, industrial biotech, and the bioeconomy.

The Motley Fool owns shares of Solazyme. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.