3 Reasons Solazyme Inc. Stock Will Rise From All-Time Lows

Volatility has taken hold of renewable-oils manufacturer Solazyme (TVIA) since it plunged to all-time lows of $5.54 per share earlier this month. One-day gains and losses of several percent have become the new normal as opportunistic investors exit short positions or pick up shares and everyone else attempts to figure out what the heck is going on. So let's be honest: The 100,000-metric-ton-per-year facility in Moema, Brazil, may have bigger problems than have been disclosed, and management needs to take the opportunity presented by the third-quarter conference call to become more transparent with investors, but there are several solid reasons Solazyme stock will rise from all-time lows.

"Guilty by association" is a weak bear argument
Unlike other industrial biotech companies utilizing the tools of synthetic biology, Solazyme enjoyed the benefit of the doubt from investors when it came to questions about scaling and ramping its technology platform. Hitting early milestones certainly helped, while holding a later IPO has also been strategically important in allowing management to avoid some of the missteps of its peers. For instance, management has been very careful to avoid providing production guidance prior to the completion of ramp-up -- projections that doomed others -- and was keen to raise funds before calamity had the chance to strike to attain friendlier terms and stoke confidence in investors with a healthy balance sheet.

Unfortunately, the company has slowly begun to lose the benefit of the doubt when it comes to commercial execution, and bears who don't necessarily understand the technology platform are beginning to appear as if they were correct all along. But it's only temporary. Those unfamiliar with Solazyme looked at the recent state of affairs and saw three things:

1. It's an industrial biotech company. 
2. It has a $1 billion market valuation. 
3. Look at the others that came before -- this won't work, either!

We still see this today in several analyst opinions and very large short positions, but the "guilt by association" argument is a weak one. Even if Solazyme encounters setbacks at Moema, there's nothing to suggest that the technology platform will not work if given the right amount of nurturing. Investors are already beginning to see technology strategy progress and execution at Amyris, which began commercial operations before Solazyme but made several large mistakes early on. While other companies haven't quite recovered, developing an industrial biotech platform doesn't guarantee disaster.

This view has essentially made Solazyme and Amyris binary stocks (they will either work beautifully or fail miserably; no in-between is considered) for the time being, but bears using the argument will probably end up on the wrong side of the argument in the long run.

Consolidation of a joint venture is looming
Assuming there aren't unsolvable problems at Moema and production levels trigger certain milestones sometime in 2015, Solazyme will be able to consolidate revenue, assets, and liabilities from its JV with partner and feedstock supplier Bunge. That will provide substantial and overnight increase in revenue and assets reported in financial statements.

Consider that as of the end of Q2 2014, the JV reported $210 million in noncurrent assets and $104 million in noncurrent liabilities. Consolidating the JV would boost Solazyme's total noncurrent assets from $95.8 million in Q2 2014 to $305.8 million. As long as substantial liabilities don't weigh too heavily on net asset totals, the company stands to benefit from getting ramp-up on track.  

An accelerated ramp phase is approaching
Assuming there's a large enough market for 122,000 MT of renewable oils per year, drop-in or otherwise (there's plenty of demand on paper), investors need to consider that the accelerated ramp phase is fast approaching for the 20,000 MT-per-year facility in Clinton, Iowa. The same should occur for Moema sometime next year. When Solazyme flips the switch at Clinton, it will be able to produce and sell hundreds of metric tons of renewable oils every month on its way to nameplate operations, which will see roughly 1,670 MT of oils produced every month.

Since management is expecting average selling prices of $2,000 per MT across its platform, the accelerated ramp phase will be an exciting time for investors. Consider the quarterly revenue potential for Clinton during various stages of the ramp:

Source: author calculations.

It may seem small at first glance, but the increased revenue potential during the accelerated ramp phase is significant for investors. Producing an additional 3,000 MT of renewable oils each quarter would boost quarterly revenue (using Q2 2014 levels) by 37%. Better yet, Moema will be able to produce five times as much volume as Clinton each month. You have to start somewhere.

There are bound to be obstacles, hiccups, and missteps in the long-term journey of any growth stock. Solazyme may have sent off the alarm bells during its recent descent to the mid-$5 per share range, but there are several solid reasons for the stock to rise from here. The looming consolidation of the Solazyme Bunge Renewable Oils JV and initiation of the accelerated ramp phase at Clinton are two major positives that are likely to occur before the end of 2015 and 2014, respectively. Meanwhile, previous bear arguments should begin to lose steam as commercial development and market development unfold. Progress in the latter may be the most significant determination of where the stock moves next.