Three Things to Become Profitable

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

Most of us have heard of Solazyme Inc (NASDAQ: SZYM).  This company is on the front lines of an industry that is attempting to create cleaner energy, in this case from bio-diesel made from algae.  It's a great idea.  It doesn't matter on what side of the line you're on when it comes to protecting the environment--diesel made from a renewable source is very appealing.  So, it's a good idea.  But is it a good investment?

Solazyme's History

This stock has gone nowhere but down for the last couple of years.  It is currently sitting close to 50% off of its 52 week highs.  If this is such a great idea, what are investors waiting for?

They are waiting for profits.

SZYM Net Income TTM data by YCharts

Profits have gone from bad to worse since January 2012.  What started as a $50 million hole, has grown to an over $80 million loss.  

This isn't just a net income problem or a margins problem, this is also a revenue problem.

SZYM Revenue TTM data by YCharts

Revenue was climbing early on in 2012, before falling in the second half of the year.

All Part of the Plan

Management isn't worried about the numbers right now.  In fact, from their perspective, they are achieving all of their goals.  From CEO Jonathan Wolfson: "2013 is a critical year for us and we are ready for it. This is the combination of more than 10 years of focused work systematically executing our strategy, delivering on our goals, and de-risking our commercial prospects."  As you listen to management talk, you begin to realize that making money isn't the goal right now.  The goal right now is laying the foundation to make money for a long time.

This year is not supposed to be the break-out year.  Management is planning for "...2014 to be the first year we are able to capture true financial returns in the form of meaningful growth in revenues and positive cash flows."  To be able to do that, this company needs to accomplish three things:

  1. Prove its technology
  2. Broaden its portfolio
  3. Establish a path to commercial production

Prove Technology

I should mention that the oils Solazyme is developing have varied uses, of which bio-diesel is one of them.  This potential for diesel from a renewable source such as algae has caught the eyes of some big dogs, such as Chevron (NYSE: CVX).  While competitor Exxon decided to fund Synthetic Genomics, Chevron decided to fund Solazyme along in their research.

This particular partnership started in 2008, and the relationship is still going strong.  Solazyme has also been showing off this technology to the military, and Chevron has been helping out with this exhibition.  It seems that Chevron still believes in this technology 5 years in.

Of course, this renewable oil production technology is being proved to several other big names such as Mitsui, Unilever, and UOP Honeywell.  Impressing top companies like these says a lot about the technology.

Broaden Portfolio

 As mentioned above, diesel is just the highest profile application of many possible applications of this technology.  Lately Solazyme has been making great progress in broadening their portfolio.

Algenist is a skin-care product that has been gaining popularity.  Sales for 2012 were up 130% over 2011.

The company has also been focusing efforts on further developing high-myristic oil.  This type of oil is often used in personal care items, and is currently derived from sources like palm oil.  Traditional sources for this oil have about a 15% concentration of this high-myristic oil.  During 2012, Solazyme has been able to increase their algae from a 30% yield to a 50% yield.  At over 3x better yield than traditional sources, there is big potential for this oil.

They have also been developing oleic oil.  This kind of oil is used for frying.  They have been able to increase the content of this to 90%.  This has garnered attention from companies like Archer Daniels Midland (NYSE: ADM).  Archer Daniels has agreed to help manufacture and market this impressive oil.  Right now the agreement calls for 20,000 metric tons in 2014.  After that they will shoot at working up 100,000 metric tons.

Establish Path to Commercial Production

Commercial production doesn't just happen--you have to have an infrastructure in place.  And in Solazyme's case, they need an infrastructure on three continents: North America, South America, and Europe.

In North America, they are benefiting from the agreement with Archer Daniels, as the manufacturing of this oil on a commercial scale is being done at an Archer Daniels facility in Clinton Iowa.  But in South America, Solazyme is constructing facilities in Brazil.  Things are progressing, and they recently secured a $120 million loan to build phase two of a facility in Lestrem.  This plant is expected to come online late this year.

Foolish Conclusion

It is rare to find a company with so much potential.  This year, as this company shifts from development to production, I expect shares to shift from hovering to climbing.  Sure, profits aren't there right now, but I have every reason to believe that they are right around the corner.  Don't wait too late to get in on this one.  Those who get in now will be rewarded the most.


Jon Quast has no position in any stocks mentioned. The Motley Fool recommends Chevron. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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