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4 Reasons to Sell Solazyme Inc (SZYM)

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Solazyme Inc (NASDAQ:SZYM) became a favorite of investors soon after its IPO and has remained in the top spot among its publicly traded peers. There are good reasons for the excitement surrounding the renewable oils producer, but no investment comes without risk. That is especially true for young industrial biotechnology companies that require boatloads of cash to reach maturity. Here are several reasons to remain cautious about Solazyme Inc (NASDAQ:SZYM).

1. Expensive capacity additions looming

Solazyme Inc (NASDAQ:SZYM) will have 125,000 metric tons of production capacity by mid-2014. That is no drop in the bucket, but it shows there is a long way to go to hit the internal goal of having 550,000 metric tons installed by the end of 2015.

Perhaps more troublesome is the fact that even after expanding the capacity of current biorefineries to their maximum levels Solazyme Inc (NASDAQ:SZYM)  will wield just 250,000 metric tons of renewable oil power. An expanded collaboration with Bunge Ltd  (NYSE:BG) will add an additional 200,000 metric tons to that figure, but the facilities adding the capacity have yet to be built. While Solazyme is sitting on nearly $260 million in cash and cash equivalents to start 2013, more funding may be needed for the company to contribute its half to the joint venture with Bunge and build another 100,000 metric tons of completely new capacity.

2. Supply chain sensitivity
When asked about a timeline for partnership off-take agreements on the most recent conference call, co-founder and CEO Jonathan Wolfson let investors in on a growing pain encountered during negotiations with partners and potential partners. Many investors may not think about it – I sure didn’t – but companies can spend many years and countless dollars growing and nurturing relationships with suppliers and customers. Wolfson explained that while potential partners are excited about Solazyme’s disruptive oils they are also sensitive to rocking the boats shared with current, more traditional suppliers.

Since Solazyme won’t initially be able to completely replace a potential partner’s supplier for any product it will have to work that much harder to get into the supply chain. This doesn’t render the company’s renewable oils obsolete by any means, but it does offer an inside look at the unobvious obstacles facing the company and its peers.

3. Synthetic alcohols challenging palm oils
As if competing with more established palm oil supply chains wasn’t difficult enough, Solazyme will also have to compete with synthetically sourced oleochemical products. Just a few years ago the price of palm oil was considered to be insulated from swings in petroleum prices. Unfortunately, that changed when various governments began awarding credits for biofuels sourced “sustainably” from palm oil. Consider that the correlation between palm oil and petroleum prices has grown from 0.174 between 2003 and 2007 to 0.526 over the last five years.

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