Rising Star Buy: Solazyme

After I sold SunPower (Nasdaq: SPWRA  ) in June, I always intended to buy a replacement alternative energy play for my Rising Star portfolio. And while I usually avoid soaring IPO stocks until the preliminary investor euphoria has worn off, I'm willing to make exceptions to that rule. This month, I'm purchasing shares of newly public Solazyme (Nasdaq: SZYM  ) .

The business
San Francisco-based Solazyme may be located in Silicon Valley, but it has nothing to do with the Internet. This biofuels company spearheads novel ways to turn cheap, plant-based sugars into affordable oil products by harnessing microalgae's oil-producing powers.

Solazyme isn't the only company making friends with miracle microalgae. Gevo (Nasdaq: GEVO  ) and Amyris (Nasdaq: AMRS  ) are other relatively new IPO companies at work in the same biofuel niche. Monsanto's (NYSE: MON  ) recent investment in another company, Sapphire Energy, suggests that big-money businesses also covet such technology.

Solazyme stands out from the pack by using "indirect photosynthesis" instead of open-pond techniques, slashing microalgae's production timing to a mere few days -- without the need for sunlight.

Why I'm buying
Alternative energy is fascinating, exciting stuff. Many of us would love more viable clean energy options to replace fossil fuels. More importantly, successful alternatives could translate into big money. Solazyme's IPO filing notes last year's $3.1 trillion market for conventional oils. Tapping into black gold's stranglehold on a gigantic market could help Solazyme and its early investors strike it rich.

Even better, Solazyme's nascent business already boasts sales from an impressive list of major customers. Chevron's (NYSE: CVX  ) Chevron U.S.A., Dow Chemical (NYSE: DOW  ) , Unilever (NYSE: UL  ) , and Qantas Airways are all either in development with Solazyme, or hammering out potential customer agreements.

The company has also sealed deals with the Department of Energy and the U.S. Navy. On June 20, Solazyme announced that the Navy had conducted a successful test flight of its Seahawk helicopter using a 50/50 blend of its algal-derived Solajet jet fuel.

Bloomberg BusinessWeek also recently reported that ASTM International (the entity that creates technical standards for airlines) approved commercial airlines' usage of biofuels derived from substances like wood chips and, yes, algae. In response, Solazyme said it's prepared for this important potential market, with plans to produce "large commercial quantities" of oils for jets by 2013 or 2014.

In an added bonus, Solazyme's products reach beyond fuel. They're already used in nutritional and skincare products available from major retailers like General Nutrition Centers (GNC), Sephora, and Whole Foods Market (NYSE: WFM  ) . That means this company's got some diversification built into its product line, coupled with powerful distribution platforms.

Sometimes start-ups in new, experimental fields like biotechs pile on the debt to finance their grand ideas. Solazyme lacks that blemish; it has $67 million in cash and just $220,000 in debt.

And now, the risks
IPOs can be difficult to value, since many often haven't turned a profit. Despite its sales, Solazyme still lands in that woeful category. In the last 12 months, the company lost $19.6 million, or $0.37 per share, despite generating about $40 million in revenue. It may not achieve profitability for years to come, and if its products ultimately fail in the marketplace... well, ouch.

Solazyme faces steep, scary competition. It rivals not only entrenched, well-capitalized Big Oil companies (many of which dabble in alternative energy), but also competing clean energy technologies, along with peers like KiOR (Nasdaq: KIOR  ) , another recently public company that transforms wood chips into biofuel.

The commodity costs plaguing consumers and businesses could hurt Solazyme badly, too. Should the price of the cheap feedstocks it uses in its processes spike, Solazyme's technology will no longer look like such a profitable route to cleaner, cheaper oil.

More intriguingly, the company could face a backlash against genetically modified organisms. Its "targeted recombinant technology" is just a fancy term for genetic engineering. (Why else would notorious DNA-tinkerer Monsanto be interested in Sapphire Energy, after all?) I'm personally not a big fan of the policies and tactics that have pushed genetic engineering into our food supply, but I'm willing to feel more positive about the practice with regard to Solazyme's efforts to create cleaner, cheaper fuel.

The Foolish bottom line
Solazyme adds a more speculative bent to my Rising Star portfolio, since IPOs are always a bit riskier than many more established companies' stocks. However, I can't resist its exceptional promise of cleaner energy -- and potentially huge sales and profits.

Better yet, success for Solazyme's products could change the world for the better. I believe that risk's worth taking.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Alyce Lomax owns shares of Whole Foods Market in her personal portfolio. For more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. The Motley Fool owns shares of Whole Foods Market and Amyris. Motley Fool newsletter services have recommended buying shares of Whole Foods Market, Chevron, and Unilever, and creating a synthetic long position in Monsanto. 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.


Read/Post Comments (8) | Recommend This Article (24)

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 July 13, 2011, at 2:21 PM, BillStacker wrote:

    So do you believe this risk is worth taking? Is that what you are saying? ;)

    Could not agree more with everything you said.

  • Report this Comment On July 13, 2011, at 2:35 PM, TMFLomax wrote:

    Ha! Thanks, I do like to repeat myself for emphasis. It's annoying in regular conversation though. ;) Thanks for your comment!

  • Report this Comment On July 13, 2011, at 10:09 PM, blesto wrote:

    If their technology is as successful as you expect, would they be a prime candidate to be bought by a big oil/energy company?

  • Report this Comment On July 14, 2011, at 6:32 AM, TMFLomax wrote:

    Hi blesto! The technology does sound promising and I suppose something like that could come to pass. I usually don't think of companies/stocks in terms of takeover candidates, generally just focus on what I believe are their own merits to stand alone, but as we all know, sometimes such things do happen and I could see why bigger companies might be interested in the future.

    Alyce

  • Report this Comment On July 14, 2011, at 8:34 AM, lemoneater wrote:

    I've wanted a pure biofuel play. I will check it out and ask the opinion of my resident scientific consultant:). If only they could make a fuel from kudzu. That plant grows inches in a day, I'm convinced.

  • Report this Comment On July 14, 2011, at 3:10 PM, TMFLomax wrote:

    lemoneater, that's pretty awesome to have that resident scientific consultant! :) And good thought on the kudzu, ha! Very renewable resource right there. ;)

  • Report this Comment On July 19, 2011, at 2:47 AM, usubanas wrote:

    Alyce: good article, seems like a good pick for rulebreakers.

    comments on your risks section:

    difficult to value: true, but with a market cap of 1.4B and the universal desire for clean fuels, the sky's the limit if their fuels are adopted.

    commodity costs: according to their website they use miscanthus, switchgrass, sugar cane, corn, forest residues and waste streams as their "flexible input". without knowing how much of each is required only corn and sugar cane seem to be an issue, but they use the word 'flexible', therefore the risk doesn't seem big on this.

    genetic engineering backlash: as you point out, that's an issue for food. but for fuels, i can't imagine anyone preferring oil from the middle east over clean, renewable, nationally-developed oil.

    competition: this is the only one that worries me. do you know how strong are their patents?

    finally, what's up with your CAPS score? need some help? :)

  • Report this Comment On December 04, 2011, at 9:51 AM, handyman77 wrote:

    Hi Alyce,

    I see Amyris and Solazyme as similar companies with the same business structure but with different bugs. Amyris uses yeast and Solazyme uses algae. They both have partnerships with larger companies or the government, both of which have deeper pockets. They are both striving for commercialization. The one difference that stands out to me is Amyris makes a point of it to cultivate a modern business culture (similar to Google or TMF.) I know because it is talked about in their filings and the website, and not so much with Solazyme. That is one of the main reasons I tend to lean towards Amyris. Have you looked at Amyris? If so did you compare the two? What would your thoughts be? If I had to choose it would Amyris but I think there would be room for both in a portfolio.

    Thanks!

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