On Friday, March 9, 2012, I had the privilege of being able to talk to CEO Jonathan Wolfson on a visit to Solazyme's (SZYM) research headquarters facility in San Francisco, CA. The short articles of this series will focus on our conversation in the hopeful attempt to further align the investment base alongside the true value proposition offered by this growing company.
The following commentary is solely based on my own understanding as an independent investor in the company, and this should be taken into account prior to forming any of the reader's own conclusions.
With an IPO that successfully raised $227 million in May 2011, significant headlines noting the company's success in the realm of biofuels, and a business model that could actually produce algae-based fuels with a 30% gross profit margin, Solazyme has easily come across as an advanced biofuel maker that has gained a strong foothold in the industry door. But as the company begins to roll out its business plan, skeptics continue to rise up and question whether the algae-derived biofuel dream could ever be realized.
Citing the lack of concentrated focus on the fuels market itself, some critics have even gone as far as to describe the company's direction as being "schizophrenic" according to Wolfson. He would continue in a response that articulated upon the needs to "having to be open to the opportunities." After all, the fuels business is a low margin, high volume industry. Wolfson would explain that in order to make sure a company is even around long enough to get to that point of being an established fuel maker, one has to take advantage of the other benefits of the technology. It would appear as if he fully understands that every solid company must first find itself a sturdy foundation to rest upon.
My view is we're practical, we're creating a lot of value. For the most part, what we do is really more narrow than people think - we're really focused on the technology in the middle. And with the exception of Algenist, where we actually did do some branding work, everywhere else is really a core technology platform. You can see we understand algae, we understand fermentation in the downstream processing, we know how to make oil, we can change conditions to optimize other things... but it's a much less broad set of activities inside of the company than people would think based on all the things [the oils] can go into. But that's why we had to partner with Dow, Unilever, Chevron, [& etc.] because you need people who understand these markets, and who are going to understand the customers. And that's not our core competency.
- Jonathan Wolfson, CEO of Solazyme
With such a large opportunity at hand and rather narrow focus when it truly winds down to it, perhaps its wise to wonder if the company is fairly being labeled in its association with mere biofuels. While undoubtedly the fuels market will one day be an essential part of the company, are investors leading themselves astray when it comes to their mere focus on this one division of the company? An argument can be made that they are.
Indeed, the company itself appears to be more fascinated by their technology's implication to industry and application across multiple high-grossing markets than it is about infiltrating a specific industry with heavy shoulders. After all, there isn't much weight to be thrown around for a company with a $928 million market capitalization, $244 million in cash, and negative income stream at present. Investors caught on the idea of this company trying to carve out a corner of fuels market should realize that such an effort would ultimately come at the opportunity cost of being able to explore and control the more niche and profitable markets with little to no competition in existence.
This is why in my last article, I centralized on the idea that Solazyme's real market strength may largely reside in its technology platform's ability to control and ultimately evolve the standards across industry (whether it be process or end product). This is why intellectual property is likely the future battleground that investors should intensely keep an eye on. The company is armed with a technology that can innovate faster than its competition. The company is armed with a technology that has a wider range of output varieties than its competitors. The real value of the company lies in the technology's ability to create and control new markets or to dominate those in existence.
The surprising thing is that investors often fail to see that this is already happening as we speak. Consider the following example found in Dow Chemicals (DOW) and Unilever (UL). Dow Chemicals wasn't just looking for a renewable producer of dielectric fluids when it inked a 80 million gallon LOI with Solazyme in 2011. The company wanted a dielectric fluid made out of a high oleic oil and had high oxidative stability, something they themselves weren't able to produce. Solazyme's technology was called upon to tailor such an oil because of its capabilities to create such unique outputs. This also goes for Unilever that is now exploring tailored nutritional oils with Solazyme.
In the same regard, the products driving the joint venture of Solazyme Roquette Nutritionals weren't just appealing in light of their comparability to flour, eggs, and butter. Rather, the reason demand is growing is likely in part due to their unparalleled advantages when it comes to reductions in fat, calories, and cholesterol without much sacrifice to taste and consistency. By use of Solazyme's technology, the market was accidentally discovered and has since grown into a division of the company with a 40-70% target gross margin. They maintain a production cost of $1,000/mt - $2,000/mt and a target average selling price of $2,500/mt - $20,000/mt. This too serves as another instance of the company's technology possibly evolving the industry.
Ultimately, as we watch the company progress along its business plan, it should be noted that the company appears to be staying focused on the technology. Though being able to take upon the responsibility of addressing particular markets directly (as appears to be the case in Algenist), Solazyme seems to be fully aware that their value and expertise lies in exploring the technology itself rather than managing the end markets that the technology can address. In regards to association, perhaps investors should do the same rather than concentrating entirely on the fuels market. Solazyme's greatest markets may have yet to be discovered.
Disclosure: I am long SZYM.