Will Solazyme Be The New Apple?

December 3, 2012  | 4 comments  |  about: SZYM

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SZYM over the next 72 hours. (More...)

Solazyme (SZYM) is a renewable oil company founded in 2003 in San Francisco, California.

Its market capitalization is 459.6M. The company, through its proprietary biotechnology platform, uses microalgae to produce what is arguably the most important good in our modern world: oil.

Its proprietary microalgae grow in the dark by consuming sugars derived by plants and produce their own nutrients without the need of sunlight or large farms. Using standard industrial fermentation equipment, algae's natural oil production can be accelerated in order to satisfy commercial levels and the company is currently in the process of scaling up.

What really sets Solazyme apart is its diversified strategy as it operates in 4 different markets: Fuels, Chemicals, Nutritionals and Health Sciences.

Demand for alternative fuels is buoyant due to environmental concerns and desire for energy independence. In 2011 the US announced plans to reduce oil imports by one-third by 2025 and renewable fuels are a key component to this goal: by the end of 2015 all its new, light duty vehicles, will be alternatively fueled. The US Navy expects to operate at least 50% of its fleet on this source of energy by 2020. Concerns over rising costs of food partially blamed on biofuels are addressed by Solazyme directly as its technology can work with a variety of inputs including corn, switchgrass, forest residue and waste streams.

The diversification strategy of Solazyme is clear in the range of partnerships it has entered: with Unilever (UL) and Dow Chemical (DOW), they plan to address the rising costs of commodities like coconut oil and palm kernel with a high quality oil substitute. Whole Foods (WFM) wants to reduce the production costs and improve food quality with Solazyme's fiber and healthful fats, crafted in a suite of microalgae-derived food ingredients. Solid growth potential is also highlighted in its skincare sector. Its own brand, Algenist, is a high-end world-renowned skincare line, patent protected with signed distribution deals with Sephora and QVC.

In the last few days Solazyme has established a partnership with ADMand Bunge Ltd. (BG) to expand its production capacity by opening a plant in 2014 in Iowa with ADM and by tripling the output from its existing venture with Bunge by 2016. It has also teamed up with Propel Fuels to sell for one month its algae biodiesel (Soladiesel) through PF retail pumps in the Bay Area.

Finally, it managed to secure three new patents in October, reaching a total number of 48 patents, according to USPTO, which helps build up a barrier to competitors.

Solazyme reported a third-quarter loss at 0.37$ per share, beating analysts expectations of 39 cents loss per share. The first positive EPS is expected for December 2014, with an average estimate of 0.37.

Yearly Earnings Forecasts

Fiscal Year End	Consensus EPS* Forecast	High EPS* Forecast	Low EPS* Forecast	Number of Estimates	Over the Last 4 Weeks Number of Revisions Up Down
Dec 2012	-1.34	-1.3	-1.36	9	4	4
Dec 2013	-1.34	-1.05	-1.78	11	1	7
Dec 2014	0.37	1.75	-1.14	7	3	0
Dec 2015	2.23	2.65	1.6	4	2	0

Solazyme health science business revenues have nearly doubled since 2011 and it is the market with the highest profit margin. The fall in profits from the previous year is mainly due to an increase in investments to enhance its capacity through the completion of infrastructures, to strengthen and commercialize its business and expand its oils portfolio. Employees have increased from 200 to 211 in the last quarter. Revenues for 2012 are expected to increase by 15% from 2011 to 44M$.

Current price is 7.55$ per share (30th November).

Analysts like Jefferies Group have recently upgraded the company with a target price boost from 22$ to 23$.

Solazyme has a 52Wk Low of $6.77 and a 52Wk High of $16.31.

P/B is an attractive 2.11, employees have grown by 51.4% in one year, assets by 203.5%.

Quick ratio and current ratio are respectively 8.5% and 8.9%, exhibiting good liquidity.

The stock is strongly underestimated because, by lacking a proper "peer group" (i.e companies with similar market, business structure, technology), it is impossible to do a weighty comparative analysis.

Summing up, I believe that Solazyme has a strong growth potential due to sound investments, a unique technology protected by patents and a diversified product strategy. Furthermore, recent insider buying implies that, at its current price, the stock is indeed undervalued.