Despite continually meeting its benchmark goals which it had set forth since its IPO in May 2011, renewable oils maker Solazyme (SZYM) has found little support over the last year when it comes to Wall Street. The company, which priced its initially well-received IPO at $18/share, managed to raise $227 million that year. In doing so, it raised a sum of capital that has thus far been projected to be adequate to sustain the company until it becomes cash flow positive. Yet, even as the company continued to surpass its own expectations, its share price has continued to linger. By May 23 of this year, the closing price was $9.72, a 46% discount to its IPO price.
The market and its analysts continue to express doubts over the advanced biofuels industry. And in many ways, Solazyme has become inevitably tied to this growing space. News of Solazyme's biofuel accomplishments with the U.S. Navy has overshadowed much of its other success in the fields of chemicals, food, and cosmetics. All of these fields have taken a backseat in the media's eyes when compared to the thought of commercial jets and warships running on fuels derived from algal oil.
Yet, since its public inception, Solazyme has dodged the thought of considering itself as strictly being a biofuel company. This was made abundantly clear ever since the company boldly defined itself in its S-1 filing with this one simple idea: "We make oil." In itself, the concept raises the question of who else does this? Oil companies dig for oil and farmers can grow it, but who can design and create it into existence? Solazyme can.
If Solazyme is to be tied to the lagging advanced biofuels industry, it begs the question - just who exactly are Solazyme's industry peers anyway? The company is most often tied to other conversion technology names such as Amyris (AMRS), Gevo (GEVO), and KiOR (KIOR), but not one of these companies can really compare. Amyris makes farnesene and Gevo makes isobutanol instead of oils, and is not able to customize their characteristics. Both companies use yeast rather than the unique advantages that algae entails. KiOR for its part can create a drop-in fuel replacement, but fails to capture much more of the higher margin industries which offer a more lucrative opportunity. Do these companies truly compare on a 1-to-1 basis?
In order to properly identify the company's industry and competitive advantage in that industry, perhaps it's important that we listen to what it is that the company itself is saying. Who does Solazyme find itself competing with? The following excerpt was taken from CEO Jonathan Wolfson's presentation at the Deutsche Bank Clean Tech, Utilities & Power Conference:
...Now remember I said that there was a second thing we do and that is using the tools of biotechnology to tailor the profile of the oils. This is something that Solazyme wasn't the first to think of. If you think of large agricultural science companies, seed companies, they've been working on tailoring the triglyceride profiles of seeds for decades. The difference is that Solazyme is working in a microbial platform. And we have a set of tools that allows us to do things in a much more directed way, and in a much more rapid and inexpensive way than it gets done in the seed world. And we're literally able to control chain length [and] saturation. We're able to add functional groups. We're able to do real remarkable things that enable us to take oil from a single fermentation asset into multiple markets. So a single plant, a single production facility, can produce oils that can go into a multitude of markets.
- Jonathan Wolfson, CEO of Solazyme
Solazyme is not positioning itself against other start-up biofuel companies. No, the company is clearly asserting its position of strength in a decades-old industry that never explored beyond its own realm of expertise - seed companies. As I detailed in this prior article, the company's true industry peers are found in names such as Monsanto (MON), DuPont (DD), and Dow Chemical (DOW). These are companies who have made it their business to design and tailor oil profiles to offer valuable characteristics that optimize the end-use product.
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Yet herein lies one of the most valuable qualities of this budding company. Solazyme is able to surpass the competition in terms of cost and quality. Because of the unique microbial platform and the "tool kit" the company has developed, Solazyme is able to produce research results with significantly less time and with significantly less money. Additionally, the company is able to create oil profiles that simply are not possible with plants.
Case in point, the company recently released details concerning its new oil profile in which it was able to completely eliminate polyunsaturated fatty acids from the profile - a task believed to be impossible with seed technology alone. This can be seen in the graphic below when compared against other products made by Monsanto, DuPont, and Dow.
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Perhaps one of the greatest forms of validation of Solazyme's technology advantage lies in the deepening relationship with Dow. As a company who in many ways should be a heavyweight competitor against Solazyme, Dow has actually partnered with the company in order to tackle the multi-billion dollar market of dielectric fluids. Signing an offtake agreement with Solazyme, the third largest chemical company in the world provides one more reason for uneasy investors to think twice about what it is they hold onto. If the industry appears to be willing to back Solazyme, why aren't investors?
Solazyme's proclaimed capability to deliver high-value products comes off as a repeated cliché that is easy to dismiss. But when one actually considers each of their products inside each of their respective industry spaces, it's clear that this company offers an abundance of value in everything it touches. The company's biodiesel is a drop-in replacement that is not hindered by cold weather. The company's food is healthier, tastes good, and addresses niche dietary restrictive markets. The company's cosmetic line uses alguronic acid that increases cell regeneration beyond the competition.
And of course, there's the company's chemical product lines which are proving to exceed existing capabilities. With such a high level of customized results, it is becoming abundantly clear that there is something unique about the technology Solazyme wields. It's a shame the Wall Street seems incapable of recognizing this just over one year out from the company's IPO.
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Please refer to my standard disclaimer statement found here.
Disclosure: I am long SZYM.
