Shares of Solazyme (SZYM) have taken a beating over the last month, dropping over 27% to $8.20, which is less than half of their May 2011 IPO valuation of $18. Although the company has made significant progress on many fronts, it appears as if the market has lost faith that profitable results will be seen in the near future. I believe that is shortsighted and that the time to start accumulating a position is now, when fear has created a temporary buying opportunity.
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Concerns
Solazyme had done a remarkable job of staying on track and hitting its milestones, but recently had to move back the completion date of its Moema plant by another quarter. Whether that means a few weeks or a few months of less production is unknown, but according to CEO Jonathan Wolfson during the latest conference call, the plant is still projected to come in as budgeted. Solazyme's CFO Tyler Painter also explained what some of the enhancements were to Moema that led to the delay: environmental scrubbers and cleaning equipment that will enable them to switch between different types of oil profiles faster.
There was also a reasonable worry about the intentions of Solazyme's JV partner Bunge (BG), as Bunge appear to be considering exiting the sugar market. Solazyme requires tremendous amounts of sugar to make its algae grow heterotrophically, and although this expedites the process and increases the oil content, such a crucial reliance on one commodity certainly entails risk. Wolfson, who is often tight-lipped on such matters, said in the latest conference call regarding this concern that "we don't expect it to have any impact on the relationship at all."
Two other issues also hit shareholders in 2013, both of which look bad on the surface. Solazyme broke off its JV with Roquette, turning an ally into a competitor and creating a far more uncertain future for its nutritional division. And their support for biodiesel projects appears to have hit a lull, as government support has dried up completely from Solazyme's quarterly reports. Still, the reasoning behind both of these is profits. Solazyme not only gets to take their products to market faster without a partner, but won't have to split future profits with Roquette. And Solazyme still appears to have an eager buyer lined up in Propel Fuels. But since biodiesel rewards them the least margin-wise, the decision not to waste precious production on it at this point when there are far more lucrative options available appears wise.
Positives
The most important concern to consider is whether Solazyme will be able to sell its product profitably for the foreseeable future. That concern has a tremendous variety of factors, each with their own risks, and yet I believe that investors can assume a high chance of success and growth for the company. It's important to remember that Solazyme can make nearly any type of oil that it sets out to create, and with exact profiles that make its products essentially perfect. This patented precision combined with the overall "green" element of its business will allow Solazyme to demand a premium for its whole range of products. And with its wide array of partnerships between various industries, Solazyme will be able to mitigate risk through a diverse profile of offerings.
Concerns about its ability to scale up production have been on the verge of being proven warrantless, as 500,000-liter runs have gone successfully and only need to increase to 625,000 for margins to be met. Solazyme still has plenty of capital left to ensure that production will get up to nameplate at all of its plants, which should help to limit the fear of further dilution. Getting enough sugar will likely always be a concern, but Solazyme still has Bunge as a JV partner, and the potential for breakthrough technology like Proterro may provide could change every equation dramatically in Solazyme's favor.
Finally, I judge a growing company by the class of its allies, and Unilever (UL), Archer Daniels Midland (ADM), Dow Chemical (DOW), AzkoNobel (OTC:AKZOY), and Mitsui (OTC:MITSY) are all high-quality companies. None of them even factor into the growing sales of Solazyme's beauty products at places like Sephora, while its nutrition lineup is just beginning to search for customers.
Conclusion
Although it might take another 18 months before investors see results, sales will keep ramping up and hints of future success should come much sooner. The global demand for oil should only increase, and Solazyme will likely be able to keep growing its divisions quickly for many years to come. It will take awhile for Solazyme's oils to take over contracts and gain market share, but I see little reason to doubt that success will come. I believe the current dip in price is a great buying opportunity, and that shareholders will be rewarded as proof comes in over the coming quarters.
By Rob Close
Source:http://seekingalpha.com/article/1862411-solazyme-time-to-get-greedy?source=email_rt_article_readmore
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