Pricing Amyris Into 2020

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About: Amyris, Inc. (AMRS), Includes: ACB, BYND, GWPH, JNJ, TWST
by: TechGrows
Summary

Amyris commands much lower multiples than similarly-hot tech/consumer product companies.

Numerous product launches in the next nine months create an opportunity for multiple expansion.

What will the revenue and the share count be in 2020? How will the stock be priced?

I have a confession: I don't like the market environment that we are in. I would much prefer to invest at a time when government bonds have 5% real yields, when the Shiller P/E ratio is at 10, and when businesses reinvest their profits instead of buying back stock, while borrowing to the hilt.

But I can't choose when I live, so I have to invest now. The monetary writing is on the wall: rates in the US are going to zero, and Japan and Europe are likely to engage in more and more radical monetary policy - are the prospects of a debt jubilee supposed to make me jubilant? They really don't.

Wishful thinking aside, the current environment means that growth is priced at an incredible premium. Any promise of secular growth creates a story stock, which warrants sky-high multiples. Here are some companies that are priced this way:

(Note: P/S multiples calculated based on annualized latest quarterly revenues, given how fast some of these companies grow)

  • GW Pharmaceuticals (GWPH) sells CBD as an epilepsy treatment. P/S=34
  • Twist Biosciences (TWST) is a hot synthetic biology company. P/S=17
  • Beyond Meat (BYND) is a food company in a hot sector. P/S=37
  • Drunk Elephant (Private) is a quickly growing skincare company. Rumored bid P/S=6.7
  • Aurora Cannabis (ACB) is one of the players in the cannabis space. P/S=25

Amyris (AMRS) has incredible prospects in ALL of the sectors listed above. It will likely become the cost leader in CBD production next year, it has the most advanced synthetic biology platform of any publicly-traded company, it has the best zero-calorie sweetener out there, and it has not one, but two hugely promising skincare brands. That's not to mention all of their other projects, like the F&F business and the HMO project. By the same standard as calculated above, their P/S ratio is 2. I'm not saying that it will rise to the levels of the companies listed above, but I think that a major rerating is inevitable. P/S of 10 for a company like Amyris seems in-line with this crazy market, which would mean 5X returns just on the multiple change, not counting the coming growth. This discrepancy is one of the biggest potential sources of alpha I currently see in the markets. The biggest question for me is: what needs to happen for the markets to reevaluate Amyris' multiples?

A necessary, but by no means sufficient, condition is solving their audit challenges. Until the company releases the 10-K for 2018 and the 10-Qs for this year, I don't see any possibility of a major move. That, however, is due to happen in September. Based on my conversations with investor relations and management's description of the situation at their recent investor call, I have high confidence that this issue will be resolved in September.

But there is one other thing that needs to happen for Amyris to get a higher multiple - it needs to catch the attention of the markets. Luckily, it has ample opportunities to do so in the coming months. Here are some of them:

Oh, Baby

Amyris is set to launch Pipette, its clean baby skincare brand in a few weeks. Baby skincare has been in the news lately, as Johnson & Johnson (JNJ) is facing over 15500 lawsuits for allegedly having asbestos in its baby products. A competitor focused on safe and natural products is likely to get a lot of media attention. Pipette is set to launch at a much higher pace than Biossance. When Biossance posted its first picture to Instagram, it was only available on Amyris' website, had one product, and the post got all of 51 likes. Pipette is launching 8 SKUs, it will be sold at Walmart and Amazon on day 1, and the launch partner, Rosie Huntington-Whiteley, routinely gets 40,000-70,000 likes on her sponsored Instagram posts. I don't know how Instagram likes translate to sales, but I know for a fact that Pipette's launch will be orders of magnitude larger than Biossance's both in terms of sales, and media attention for Amyris.

Pipette SKUs (Pipette 2019 lineup. Source: company presentation)

Living the Sweet Life

The sweetener, purecane, will launch shortly thereafter. Out of the whole product lineup of the company, this is the one I'm personally most excited about. I have never in my life bought any sweetener other than sugar for cooking, but I will completely switch to purecane as soon as it comes out. It's just the best sweetener I've ever tried. I can't imagine a scenario where Amyris will not be sold out of purecane for the foreseeable future - the taste of sugar without the calories is an unbeatable value proposition in today's world. Unlike Amyris' other products, this one is a genuinely new one for consumers. You could buy squalane made from sharks or CBD made from weed, but Reb M has simply not been available to consumers. This complete novelty is why I'm most optimistic about this product - the more novel something is, the more attention it's going to get. Josh Wolfe, one of the best VCs alive, describes humans as novelty-seeking primates. I find that observation to be very astute, and it's why I think that purecane will be the highest-profile launch for Amyris. It's launching later this year.

(Purecane packaging. Source: purecane website)

See that CBD, Simba? Everything it touches turns to gold

Marijuana/CBD is one of the biggest secular growth stories of our time. It is, perhaps, the biggest secular growth story that's not primarily tech-based, so it's very accessible to the retail investors. That's why there are many multi-billion dollar companies with tens of millions of dollars in revenue in the sector. As soon as Amyris starts producing CBD next year at a lower cost than anybody else, I expect it to attract significant attention and investment from the sector. Collaboration revenues are good in the meanwhile, but most CBD investors have no way to evaluate whether Amyris can indeed produce CBD cheaply. The proof is in the CBD-infused pudding, and as soon as Amyris starts CBD production in 2020, I expect its investor base to widen dramatically.

In addition to all of that, management recently mentioned that they are working on some new collaborations. Given their huge pipeline, I wouldn't expect them to look at small collaborations not comparable in size to CBD or Reb M. The signing of any of those would likely also be big for the company. Overall, throughout all of the years I've followed Amyris, I don't think there has ever been a nine-month period with so many big catalysts for the company, as the following nine months will be.

The Numbers

The first part of this article focused on the catalysts, simply because I think that they are the most important given the discrepancy between the multiples of Amyris and other hot companies. But I would be remiss not to talk about what the financials will look like. Given that management just reaffirmed the 150M target for this year's revenue, I expect it to break down like this:

  • 60M from clean beauty (Biossance+Pipette)
  • 25M from CBD milestones
  • 20M from other collaboration revenue (HMO, F&F collaborations)
  • 13M from sweetener
  • 32M from squalane as an ingredient and F&F product revenue

Amyris expects to convert $34.5M of debt into shares as soon as it is SEC compliant, bringing the OS to ~115M shares by my count (103 as per the latest presentation + 34.5/2.87) and the total debt down to $150M. I expect debt to be further reduced next year. Let's be conservative and say that they extinguish another 50M in debt via insiders exercising their warrants at the same share price. That adds another ~17.5M shares OS by the end of 2020. Let's say that 20M more shares are added to provide cash for the company's operations. That brings the OS by the end of 2020 to 152.5. What will the 2020 revenues look like? I conservatively expect something like this:

  • 120M from clean beauty (slightly lower Biossance growth rate offset by higher Pipette growth rate).
  • 75M from collaboration revenues, 50M of that being CBD. Management says that CBD collaboration revenues could be as high as 100M next year, but 50M is the floor.
  • 30M from sweetener - this is where Amyris may surprise to the upside, though. If it sells as well as I expect it to, I think Amyris may be able to increase production of their sweetener at the contract plants.
  • 50M from squalane as an ingredient and other F&F molecules.
  • CBD product revenues are the big unknown. Long-term management expects them to dwarf the collaboration payments, but I will pencil in a very conservative 10M.

That brings my 2020 revenue estimate to 285M. This estimate is based on continued strong growth in clean beauty, but conservative sweetener/CBD assumptions and no HMO product revenue. I simply don't know enough about the HMO deal to make predictions based on that. It also doesn't include any revenue from the Yifan vitamin deal. With 285M in revenue and 152.5M shares OS, here is how the share price can look given a wide range of P/S multiples:

P/S Multiple Share Price
1 1.87
2 3.73
5 9.34
10 18.7
25 46.7

In reality, I expect both the revenue and the OS to be slightly higher next year, but you can see that the most important factor for the stock price is the multiple. Where will the multiple end up next year? Who knows? All I know is, given the current market environment, the range of possible outcomes is wide, and I find the risk/reward ratio to be incredibly compelling for the company. I expect the next 9 months to be some of the best months for the Amyris stock, given how much they will launch over those 9 months, and how much attention that will bring to the company.

There were a few pieces of news about the company that didn't fit into my article, so I'm just going to quickly list them below for those who are reading this to catch up on the company:

  • LAVVAN hired an experienced management team from MedReleaf, which was sold to Aurora Cannabis for $2.5B
  • Amyris hired a temporary CFO to get them through their audit troubles as soon as possible.
  • One of the top 3 beverage companies is looking to use Reb M in their formulations. Smaller customers expect products with Reb M to be on sale this year.
  • Operationally, this is the best year for Amyris for as long as I can remember. 2nd batch of purecane is being produced at 6X efficiency compared to the first batch. Squalane production for this year is expected to be up 80% YoY.
  • The convertible debt will be transferred to an insider later this year.
  • Amyris is introducing 2 new products for Givaudan and Firmenich.
  • Amyris is on track for 55-65% gross margin this year.
  • Biossance as a brand is now #33 at Sephora NA vs #57 last year. It's #8 at Sephora Brasil.

Disclosure: I am/we are long AMRS. 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.

Additional disclosure: I am not a registered financial adviser, and this is not financial advice. Please conduct your own due diligence and consult a financial adviser before making investment decisions.