Gevo Is A Hot Mess

| About: Gevo, Inc. (GEVO)

Summary

Gevo works in the renewable fuel space, and the company is well known for creating jet fuel from alcohol.

While the technology itself is viable, Gevo's business is not cost efficient enough for commercialization, and the company has a negative gross margin.

Debt is coming due, and Gevo is forced to dilute shareholders. The market is punishing the firm severely, and there may be further losses.

Gevo, Inc. (NASDAQ:GEVO) is an American renewable chemical producer. The company specializes in the conversion of raw materials into something called isobutanol. This fuel is used in the petrochemical and refining industry. Gevo also produces plastics, rubbers, and other polymers, along with hydrocarbon fuels. But the most interesting thing about Gevo is its production of renewable jet fuel, which it uses alcohol to make.

Sustainable aviation fuel, or SAF, has been a hot topic, especially in light of concerns about climate change. It was hoped that Gevo's aviation fuel business would save the company from the revenue declines it sustained in the past. However, despite what, on the surface, looks like a pretty cool business, Gevo's stock has been an almost perfect short since its IPO in 2011 - legacy investors have been wiped out to the tune of 97%. And if the events of February 13, 2017 are anything to go by, the party is far from over.

On February 13, 2017, Gevo announced a public offering of stocks and warrants with the goal of using 15% of the proceeds from this sale to pay down senior secured notes due this year. The company has around $36 million in long-term debt and $29 million in revenue.

Gevo burns through around $28 million in cash from operations every year. But what is most troubling is its abysmal gross margin of -32% - this translates to a gross profit (loss) of $9 million annually.

With this in mind, it shouldn't be surprising that Gevo was forced to turn to the equity markets for much-needed cash.

Investors have been fleeing the stock since September in anticipation of this seemingly inevitable capital raise. Gevo's market cap fell from $65 million to a mere $25 million in the latter half of 2016, but as soon as 2017 started, short interest jumped through the roof and drove market cap to a mere $12.55 million.

Is Gevo Still a Good Short?

On the surface, the 30% drop seems to be an overreaction. While dilution is always bad, in this case, there is a very good reason for it - debt coming due. Gevo also clearly has a viable technology. It even has a contract with Lufthansa (OTCQX:DLAKY), the largest German airliner, for up to 40 million gallons of fuel. However, with such a poor gross margin, it is hard to get excited about Gevo's business unless we see a drastic improvement in its technology - and how can this happen when the cash-strapped company can only spend $5 million annually on R&D?

On top of this, while equity dilution is always an option for cash-strapped firms, it becomes less viable when the market cap hits such rock-bottom prices. At $16 million market cap, Gevo may be nearing the end of the line for its dilutions. On top of this, there is another problem: the stock is again nearing the $1.00 threshold for the NASDAQ delisting, and this raises the possibility of a stock split. Stocks tend to perform poorly after splits because such events are a lightning rod for short sellers.

Conclusion

An abysmal gross margin, along with cash challenges and dilution, makes Gevo a compelling short. Its technology, while promising, simply does not seem cost efficient enough to be the foundation for a successful investment at this time.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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