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Beware Facebook, Hubris Killed Sustainable Chemicals

Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A lot of attention has been paid to Facebook’s (NASDAQ: FB) IPO. Is the social media giant overvalued? The answer is clear to Peter Cauwels and Didier Sornette, entrepreneurial risk analysts at the Swiss Federal Institute of Technology Zurich, who have published their detailed valuation tools for social media companies. The duo believes Facebook is really only worth about $30 billion. With overvaluation fresh in mind, I want to reevaluate the lofty promises made by sustainable chemical companies. 

Oh My-P-O

In February TheStreet’s Eric Rosenbaum ran an article titled The Worst IPO Peddling Isn’t Social Media. There is really no arguing the numbers. Management for each company priced their respective IPOs as high as possible to quickly build a pile of cash, which probably wasn’t a bad idea given the expensive price tag of a biorefinery and the fact that they were each years away from meaningful production. As the chart below shows, promising too much too soon has crippled the industry. 

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>52-week high</strong></p> </td> <td> <p><strong>IPO price</strong></p> </td> <td> <p><strong>May 16<sup>th</sup> close</strong></p> </td> <td> <p><strong>% from IPO</strong></p> </td> </tr> <tr> <td> <p>Solazyme</p> </td> <td> <p>$27.47</p> </td> <td> <p>$18.00</p> </td> <td> <p>$9.69</p> </td> <td> <p>(46.17%)</p> </td> </tr> <tr> <td> <p>Codexis</p> </td> <td> <p>$10.98*</p> </td> <td> <p>$13.00</p> </td> <td> <p>$3.20</p> </td> <td> <p>(75.39%)</p> </td> </tr> <tr> <td> <p>Amyris</p> </td> <td> <p>$30.78</p> </td> <td> <p>$16.00</p> </td> <td> <p>$1.58</p> </td> <td> <p>(90.13%)</p> </td> </tr> <tr> <td> <p>Gevo</p> </td> <td> <p>$20.64</p> </td> <td> <p>$15.00</p> </td> <td> <p>$5.84</p> </td> <td> <p>(61.07%)</p> </td> </tr> <tr> <td> <p>KiOR</p> </td> <td> <p>$23.85</p> </td> <td> <p>$15.00</p> </td> <td> <p>$11.00</p> </td> <td> <p>(26.67%)</p> </td> </tr> </tbody> </table>

*All-time high of $12.24 in April 2011. Data compiled from Google Finance.

Going public with a large amount of hope and potential built into your share price can be dangerous for investors and the perception of your industry. It’s the main reason algae fuel companies such as Sapphire Energy, Algenol, and Joule Unlimited have remained on the sidelines – waiting to go public until they have something to actually brag about.

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Market cap (IPO)</strong></p> </td> <td> <p><strong>Book value (IPO)</strong></p> </td> <td> <p><strong>Market Cap (current)</strong></p> </td> <td> <p><strong>Book value (current)</strong></p> </td> </tr> <tr> <td> <p>Solazyme</p> </td> <td> <p>$1,078 million</p> </td> <td> <p>$4.42</p> </td> <td> <p>$585 million</p> </td> <td> <p>$3.99</p> </td> </tr> <tr> <td> <p>Codexis</p> </td> <td> <p>$453 million</p> </td> <td> <p>$3.08</p> </td> <td> <p>$116 million</p> </td> <td> <p>$2.67</p> </td> </tr> <tr> <td> <p>Amyris</p> </td> <td> <p>$702 million</p> </td> <td> <p>$7.01</p> </td> <td> <p>$89 million</p> </td> <td> <p>$2.36</p> </td> </tr> <tr> <td> <p>Gevo</p> </td> <td> <p>$396 million</p> </td> <td> <p>$3.49</p> </td> <td> <p>$148  million</p> </td> <td> <p>$2.89</p> </td> </tr> <tr> <td> <p>KiOR</p> </td> <td> <p>$1,517 million</p> </td> <td> <p>$2.41</p> </td> <td> <p>$1,136 million</p> </td> <td> <p>$2.18</p> </td> </tr> </tbody> </table>

Data compiled from Google Finance. 

All companies are losing money and taking on debt. All companies are targeting full commercial scale years away. All companies have sky-high potential. With a lot of “bubble money” out of shares, have any value opportunities emerged? It is tough to justify any investment right now.

The veteran

Industrial enzyme producer Codexis (NASDAQ: CDXS) was the first big player in the industry to go public in 2010. The company finds itself in an interesting position. Should the cellulase enzymes being produced work as promised the company could one day become a supplier to the entire industry. However, that is still years away. Shares have quietly been sliding as investors await big partner Royal Dutch Shell’s decision to renew or cancel an ongoing research agreement. The oil giant recently walked away from industrial enzyme producer Iogen, which only added to speculation. Therefore, there is no point in investing in the company before a decision is made.

Amyris pays for rosy projections

Amyris, Inc. (NASDAQ: AMRS) had originally projected that it would produce 2.5 million liters of farnesene per quarter per facility, but only produced 900,000 L in 1Q12 and 565,000 L in 4Q11. There is progress being made, it is just occurring at a less optimistic pace. CEO John Melo recently stated that the problems facing the technology platform during scale-up centered around microbe yield and harvest (separation) loss, but was mum on the details.

In terms of pure book value it is the only company trading at a discount. I would keep a distance until more progress is witnessed and the company is more upfront about the specific challenges it faces. The company is only focusing on one of its three production facilities, so the faster it can increase production the faster it can bring additional capacity online. Will production per facility per quarter plateau near 900,000 liters or continue to gradually climb? Will it ever reach 2.5 million liters?

<img src="/media/images/user_6293/melosmile_amyris_large.jpg" />

Amyris, Inc. CEO John Melo wouldn’t be caught smiling around a production bioreactor these days. Can his company fight its way to yields once promised to investors?

Foreshadowing the fate of the new guys?

As Adam Lesser of Gigaom writes, Amyris serves as a great example of the “first-mover disadvantage” that is inherent in renewable technologies. Unfortunately, all of the companies listed above have different microbes producing different products in different technology platforms. So the last company to reach commercial scale will have little to learn from the mistakes of its peers, except perhaps humility.

I am just as cautiously optimistic about the prospects of Solazyme (NASDAQ: SZYM) and KiOR (NASDAQ: KIOR) as anyone. However, I believe there is still too much downside at the current valuations. As the companies build out scale they will be forced to use their large cash positions and take on more debt – a trend that has remained constant with older players in the industry – thus pushing book values even lower than $3.99 and $2.18 per share, respectively.

Both companies have a projected schedule of production. Amyris demonstrated that may be more of a liability than expected. One slip will result in pushing production projections further into the future and the market equivalent of a time-out. Looking at the numbers, I just would not feel comfortable investing in these companies, either.

Foolish bottom line

The sustainable chemicals industry has all of the potential in the world. With little real performance, however, it is difficult to endorse any investment. Yes, the companies are presented at more attractive valuations than the hefty market caps they commanded at their respective IPOs. But without generating cash or products at a meaningful scale they still have too much to prove. The lofty promises have proven to be costly mistakes on the public market. Companies should be wary of making future predictions, such as becoming cash-flow positive in year 201X, because Mr. Market is about fed-up with the industry.

If you can stomach it, then perhaps you will price in future potential to current share prices to justify an investment. Just remember that full production scale for these companies will not become a reality until 2015 – should all things go as planned. This year has proven that in this industry plans are flexible, even if they aren’t advertised as such.

Did you enjoy this article? Follow me on Twitter to keep up with my future posts on energy, sustainable chemicals, and biopharmaceuticals @BlacknGoldFool.

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BlacknGold owns shares of Codexis and AMYRIS INC COM. The Motley Fool owns shares of Solazyme. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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