Renewable oil products developer Solazyme (NASDAQ: SZYM) may offer enormous promise in the renewables space, but investors are having none of it in 2014 with the stock losing one-third of its value year to date.
However, Solazyme's move lower may not come as a complete surprise to Wall Street or investors as short interest in the stock has been steadily rising in recent weeks. As of Sept. 15, 2014 more than 20.6 million shares of Solazyme were being held short by investors (i.e., investors betting Solazyme shares would head lower) compared to 19.8 million shares held short in August.
Why are investors so pessimistic with regard to Solazyme's future? That's a question we'll answer today, as well as provide some context as to whether or not Solzayme is still a short-sale candidate.
Why shorts are piling into Solazyme
Perhaps the biggest challenge that Solazyme has faced are the unrealistic expectations of Wall Street and investors.
It's no secret that expectations are high for Solazyme's product to transform industries ranging from food to automotive with its renewable oil products. However, the process of going from concept to actual production has taken longer than expected. After multiple delays the company announced that in late May commercial production began at its Moema facility in Brazil, which should generate 100,000 metric tons of renewable oils when at full capacity. Realistically, though, Solazyme is still years away from reaching maximum production capacity, leaving investors to absorb the idea of ongoing losses in the meantime.
Source: Solazyme Q2 presentation.
Secondly, and building on the first point, Solazyme isn't projected to be profitable anytime soon despite its full-year revenue expected to jump from nearly $40 million in 2013 to $600 million in 2016. The good news for Solazyme is that the company is working with $285.2 million in cash and cash equivalents as of the latest quarter, but the bad news is, assuming no additional production delays, that it could burn through $125 million to $150 million of that cash through fiscal 2016. It's possible the company could become cash flow positive as early as 2016, so that would be something for investors to closely monitor, but cash burn appears to be an obvious concern for investors until Solazyme turns the corner to profitability.
Lastly, as bioprocessing guru and Foolish colleague Maxx Chatsko pointed out last month, Solazyme still has a lot to prove with respect to its ability to meet deadlines. Big companies, which could have a direct and rapid impact on Solazyme's bottom line, are unlikely to commit to a large or long-term deal for Solazyme's products until the company can demonstrate that it can consistently produce at a high level.
Solazyme has promise, too!
Perhaps the greatest allure of Solazyme is that it could play a substantial role in reducing the United States' reliance on foreign oil, at least in regard to lubricant production. Considering that the U.S. government is encouraging the use of renewable products, it's not inconceivable to expect businesses to seek out companies like Solazyme which could save them money in the long run through either lower product costs or tax credits.
Source: Solazyme Q2 presentation.
Additionally, few renewable oil products producers have the technology that Solazyme possesses. This technology gives Solazyme a distinct first-in-class advantage that it can use to command solid pricing power with its customers, as well as utilize to push its costs lower as time passes.
Is Solazyme still a short-sale candidate?
Now that you have a better idea of why skeptics have piled into Solazyme, as well as what kind of promise the company holds, let's get back to the most basic of questions: Is Solazyme still a short sell?
To answer this question I would suggest that it really just depends on your investing timeline.
In the near term it's quite possible that Solazyme could see additional downside. The company's high short interest is an indication that its recent inability to dramatically boost its production and substantially add to its client portfolio could adversely affect its chances of being profitable sooner rather than later. It also brings into question whether investors' expectations for Solazyme are unrealistic. I recall similar hype years ago for ethanol producers, and a vast majority of those companies have failed to live up to their hype.
Over the big picture, however, I see Solazyme's technology being a prime selling point for investors. As long as its technology works toward lowering its costs to the point where they are price-competitive with traditional oil products, then its share price should have some upside down the road.
So is Solazyme a short sell? The answer depends on your investing time horizon.
