Solazyme: A Lesson in Patience

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.

I have given the investment community targeted warnings about Solazyme’s (NASDAQ: SZYM) valuation in February ($14.34 per share), March ($15.13 per share), May ($9.71 per share), and August ($13.50 per share). Despite these words of caution I have been constantly drowned out in a sea of overconfidence and opinions that shift to fit the situation at the moment. Now I know how Kyle Metivier feels when he makes successful call after successful call with little fanfare. It was said that I “didn’t understand the value” of the company’s business lines. It was said that I “didn’t understand” that Solazyme was different. It was said that I just “didn’t get it,” whatever “it” is.

Well, I don’t see anything wrong with believing in the long-term value of a company while simultaneously waiting for a better entry point. A great growth opportunity won’t amount to much if you pay a hefty premium for a piece of the action. An investor who patiently waited until today to open a position – when all evidence available showed no reason to rush in – can now buy 2.5 times the number of shares over the IPO price for the same amount of money. Heck, you can almost buy 2 times the number of shares today than you could have just 3 months ago.

Here are three red flags to acknowledge before jumping into the company, even at this valuation:

1. Large CEO Trades

This is not meant to deride Jonathan Wolfson. I admire him for bringing this technology platform from a garage to demonstration scale (and for sacrificing his entire 20’s to the prison of academia). But admiration aside, Wolfson has participated in selling $2,339,430 worth of shares since June – more than double the amount sold in the previous five months. That figure represents an astonishing 8.6% of total company revenues over the same time frame. I know Wolfson has a large position in the company he co-founded, but if Solazyme were currently as undervalued as some contend, wouldn’t the insider transaction pendulum be swinging in the other direction? Wouldn’t he be buying at $9.50 instead of selling?

2. Only 20% Capacity Installed

Yes, the 500,000 MT of total oil capacity being targeted by the end of 2015 is substantial. It only amounts to 3.5 million to 5 million barrels of oil (depending on product); but each Solazyme barrel can contain up to 80% of tailored oil compared to the numerous products retrieved from a barrel of dinosaur sauce.

<img src="/media/images/user_6293/products_from_barrel_crude_oil-large_1_large.jpg" />


However, if everything goes as planned through the end of this year, only 20% of that capacity will be in place. That leaves 80% of their targeted revenue stream vulnerable to setbacks.

Continuing to meet deadlines on time will certainly reduce the risk of something going wrong down the road, but it doesn’t eliminate risk completely. I also like the fact that risk is spread across multiple JVs such as Roquette Nutritionals, Bunge (NYSE: BG), and Chevron (NYSE: CVX). Other sustainable chemical companies haven’t been so lucky (Shell bailed on Codexis, Total cautious about Amyris (NASDAQ: AMRS)). As long as the company proves it can produce a wide oil profile with just 500,000 MT of capacity at JV controlled facilities, most of my scale-up concerns will be relieved when 750,000 L bioreactors are shown to work as planned.

3. Dependency on headlines

Read around the web and you’ll notice that a lot of investors have reassured themselves that the recent “slide” is due to a lack of catalysts. This may very well be true, but if your investment’s fate is handcuffed to petty news releases then maybe the company isn’t at fault. There is plenty of time between now and 2015 – or even 50% of full production capacity for that matter. Unfortunately, when engineers are busy cranking out production characteristics from demonstration facilities or switching to commercial scale, there are few things to communicate to the outside world. No headline will read “Significant Progress: Engineers Put in Another 12 Hours Today” (yes, we get the joy of 12 hour shifts).

I had to recently cancel an interview with KiOR (NASDAQ: KIOR) because all hands on deck are working to meet their year-end deadline for commercial production. Add up all of the writers and bloggers that have been turned down in recent months and you get a big shortage of news. KiOR, although overvalued based on my shareholders’ equity assessment for the industry, has declined on low volume in recent months – perhaps due in part to a lack of catalysts.

One important thing to bring to light: If the company wasn’t trading at such a premium to begin with, then it wouldn’t have any market cap to shed due to a lack of catalysts. Stocks can go sideways you know.

Foolish bottom line

Solazyme has fallen over 40% since my Aug. 8 warning. The company has eight quarters between now and 100% production capacity, five (going on six) consecutive quarters of growing losses, and nearly 400,000 MT to prove. Can someone please tell me what I’m missing?

I see that the company is targeting $1 billion in revenues by 2015. And yes, Solazyme will and should be treated like a high growth company once that comes closer to fruition. Just don’t get too confident in your predictions at the moment. Anyone who blindly backs the company by pointing to crystal ball predictions without acknowledging the risks involved or the lofty valuation at current prices is a fool (small f).

Have fun averaging down while I’m accumulating shares at more realistic – and risk reducing – prices.

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

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BlacknGold has no positions in the stocks mentioned above. The Motley Fool owns shares of Solazyme. Motley Fool newsletter services recommend Chevron. 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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