Why Did Solazyme Rise 8.9% As The Market Tumbled?

Jun.12.12 | About: TerraVia Holdings, (TVIA)

Renewable oil innovator Solazyme (SZYM) rose 8.9% to $12.10 on Monday's trading session in an atypical jump that defied the gravity felt nearly everywhere else on the market. As the Dow Jones Industrial Average fell 1.14%, or nearly 143 points over the same day, Solazyme's strong upward momentum proved to decouple with the general market trend. By day's end, the company's movement stood as the 5th largest percentage gainer trading on the Nasdaq.

Yet with a lack of correlative news to justify the strong momentum, many are left wondering what exactly took place here. Bloomberg's Samantha Zee made a great effort in the article located here in which she asserts that "hope for Brazil sugar plant with Bunge (NYSE:BG)" is what served as some form of catalyst. But in light of the drastic pullback since the start of April which coincided with Piper Jaffray's lone downgrade of the company, it seems unlikely that a sudden breath of inspiration related to that old news would send the stock soaring high.


A more likely explanation lies in the technical accomplishments that are easily expressed in the Yahoo! Finance chart shown below. For some time the company had been forming a solid bottom in its share price. Combined with the nearly 7 million shares short (as of 5/31/12) of a stock with an average volume of about 500,000 shares/day, the likeliness of a short squeeze seemed imminent. This is especially so considering that this amount of short shares accounted for roughly 20% of the publicly traded float. Couple with the surpassing of the key indicator mark of the 50-day moving average, and the perfect storm appeared set for Monday's gains.

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However, those caught up in the more technical explanation of the situation may just as easily lose sight of what is brewing over at Solazyme. In this respect, Zee's reporting of the ongoing progress of the company touches upon the more important concept at hand. Despite its early stage nature that has often served as a stigmata to its technological advancements, Solazyme's progress has continued to meet and excel alongside its clearly portrayed guidance.

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As demonstrated with the clear milestone chart above, perhaps what makes the company more unique than most start-ups is the amount of attention to detail and foresight that has helped it stand out from the competition. When algae producers sought to use photosynthetic algae, Solazyme backtracked and successfully reinvented itself with a heterotrophic (grow-in-the-dark) process that can easily scale to capacity. They did so because they foresaw that photosynthetic algae wouldn't be practical from a cost perspective. As the industry struggled to make a cheap biofuel commodity, Solazyme diverged into higher-margin markets of cosmetics, food, and chemicals in order to build a foundation that could sustain its operations. Time and time again, the company has shown its ability to adapt in order to accommodate the end goal at hand.

Now years down the road from merely demonstrating the technology, Solazyme has already proven it. The company is now actively commercializing its technology, and doing so with some of the best partners in their respective markets. Companies like Bunge, Chevron (NYSE:CVX), Dow (NYSE:DOW), Roquette, and Unilever (NYSE:UL) all serve as viable partners with extended market know-how. With distribution networks and superior market relationships of their own, such companies actually make it advantageous for Solazyme to seek 50/50 joint ventures rather than competing against them.


As new investors look to the company's negative earnings and just as easily dismiss the company itself, those with longer horizons know just how fast growth will be as manufacturing capacity comes online. By the end of 2011, the company did approximately $39 million in revenues. However, by the end of 2014, the company is expected to do nearly $400 million in revenues. By 2015, estimates based on production goals place the company's revenues at $800 million to well over $1 billion in revenue. With the lowest gross margins ranging between 30-60%, one doesn't have to imagine too much further in order to predict just how fast earnings growth will be in such a short amount of time.

Yet until this is realized, the company continues to trade in the volatile fashion it does. Monday's gain is just another chapter in a book of large percentage gains and losses over the stock's trading career. Since the company's IPO a little over a year ago, shares have seen a high of $27.47 and a low of $7.68 with very limited dilution to account for the difference. With a current market capitalization of $730 million as of June 11, Solazyme now sits at a 33% discount to its IPO price. At least on Monday, it appeared that investors found this to be far from fair.

Disclosure: I am long SZYM, BG.