A rising tide is supposed to lift all boats, but the market's rise this year has left several companies behind. Investors hoping to tap into the high growth story of renewable oils manufacturer Solazyme (TVIA) have been caught off guard in 2014. The most recent developments have put Solazyme stock in the red for the year -- and near all-time lows -- on the way to underperforming the S&P 500 by over 28%.
The abysmal performance is far from what investors were expecting. After all, the company harnesses a technology platform capable of replacing less efficient agricultural and petroleum production systems, is flush with cash, and is finally on the road to commercial production and steady cash flow. So why has Solazyme stock fallen so low in 2014?
Missing: big updates
The first major excuse for Solazyme's negative return this year is a lack of major announcements. Rather, investors factored several key milestones into the share price before they actually occurred. September has arrived, and investors are no closer to understanding progress (or setbacks) at the largest manufacturing facility in Moema, Brazil, which will churn out 100,000 metric tons of renewable oils annually at full throttle. Initial production started in the second quarter, but commissioning -- the validation of equipment operation, originally slated for completion in the fourth quarter of 2013 -- was still ongoing in the third quarter of 2014.
Meanwhile, major offtake agreements have been largely absent. That's to be expected from a new platform technology still proving its reliability. Most customers won't expose their supply chains to Solazyme's production capacity if it hasn't demonstrated steady, reproducible, and reliable production. Larger companies may be able to take on bigger risks with their supply chains and focus on long-term expectations, but there's more risk for smaller companies. Investors will simply have to be more patient.
To be fair, shareholders have enjoyed plenty of good news, too. The start-up and initial ramp-up of the 20,000-MT facility in Clinton, Iowa, was announced in February, while additional funds were raised one month later. Additionally, Clinton has steadily increased output and customer count as it nears the final ramp-up stage -- good early indicators. It appears investors set the bar too high, however, and the share price certainly reflects the disappointment in short-term performance.
Bearish sentiment
Another excuse for Solazyme stock's fall through the first eight months of 2014 is the major increase in short interest, or the number of shares sold short but not yet covered or closed. Take a look at the percentage growth in short interest from baseline values one year ago compared with the increase in total outstanding shares. While share count has grown 21% in the prior 12 months, the total percentage of shares sold short has ballooned 132% in the same span.
Note: 1.00 equals baseline values on Sept. 15, 2013. Source: NASDAQ; graph created by author.
I'm pretty confident the increase in short interest is unsustainable in the long run, but the problem is knowing when events will occur that prove bears wrong. Will it be tomorrow or 12 months from now? Either is possible.
There are several good arguments that support the increased pessimism. Solazyme's increasing share count, continuous delays at Moema, and steady reminders that investors may have set the bar too high initially are all reasons to check expectations. Investors should also consider that the company won't produce 120,000 MT of renewable oils (the combined nameplate capacity of Clinton and Moema) in a rolling 12-month period until the span ending in December 2016. In addition, the company will fill large volumes of initial capacity with low-value fuel blends (sales of which began in the second quarter) until markets are developed, further dampening short-term optimism.
That all combines to make meeting Wall Street's current expectations for $278.5 million in 2015 revenue practically impossible. Of course, that shouldn't be much of a surprise, considering the long history of unrealistic expectations.
More patience required
The lesson for investors is that Solazyme doesn't get the benefit of the doubt from the market, partly because of its own mistakes and partly because of those of other next-generation industrial biotech companies. It will take time to develop markets, relationships with customers, and the track record that supports annual capacity expansion to levels well above 120,000 MT. However, if you take the long-term view, then it's awfully difficult to pass up shares at a market valuation of less than $700 million. Just don't be surprised if Solazyme's stock falls even further should headwinds arrive in the next few quarters.
