Solazyme (NASDAQ:SZYM) Expected To Pick Up Its Profitability By 2016

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By Hanson So on October 27, 2014 Company

Shares of Solazyme (NASDAQ:SZYM) are down by 40 percent whereas the market capital of the company has been reduced by 1/3^rd. The company deals with the production of renewable oils from algae instead of tapping into the non-renewable oil reserves. The process involves fermentation of bacterial cells in a tank; oil can be generated within a few weeks.

Where the company is facing some difficulties right now, chances are that it will get back on its feet by 2016 with a speedy progress rate; having said that, it should be kept in mind that the company does not have any prospects at least for the near future.

Solazyme (NASDAQ:SZYM) has two operating units at the moment. One unit is based in Clinton, Iowa, which has around 20,000 metric/year production rates whereas the other one is located in Brazil with 100,000 metric/year production. Apart from these two facilities, the company also possesses a smaller unit in Illinois with a total capacity of 2,000 metrics per year.

The manufacturing units take around twelve to eighteen months before their full capacity can be used. Solazyme’s Clinton unit started production in January, 2014, which means that the full capacity of that particular unit will be achieved somewhere between January and July 2015. Similarly, Brazil’s unit started production in May; meaning that the full capacity can be reached by May or November 2015. According to estimates, the company will reach its full potential by 2016.

The management of the company has made declarations that it will sell its portfolio at 2,000 dollar per metric. The company has several profiles, including cosmetics and food ingredients; however, those profiles do not indicate the average selling price of the company’s products. The company expects the average selling price to increase and cross the 2,000 dollar per metric range in anticipation of profitability in its food profile.

If all the estimates are close enough, Solazyme (NASDAQ:SZYM) will have around $244 million of revenues from its production by the end of 2016. The revenues will touch the figures of $294 million if its cosmetic profile remains successful. The company plans to focus primarily on its Fuels & Chemicals segment with an expectation of gross margin of 30 percent. Apart from it, the company plans to focus on Nutrition, and Skin and personal care segments as well, with expected gross margins of 40 percent and 60 percent respectively.

Once each unit is operating on its full capacity, the company expects to reach its target margins. Moreover, the margins are low because the tank capacities of both the units are different and the company has to send the oil some miles away for refining and processing.

Currently, the company is, no doubt, going slowly but the chances are that it will pick up by 2016 and hence, investment in the stock is not a bad option.

The company, on the last trading day, October 24, 2014, started its stocks at a price of $6.42 and closed at an increased price of $6.54. Solazyme (NASDAQ:SZYM) has a target price of $14.5 on its stocks.