Time to Bet on This Innovative Materials Stock?

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Solazyme's (NAS: SZYM) story is an interesting one. Its technology to convert plant-based sugars into oils using microalgae is one-of-a-kind and is finding takers, but the stock has been bashed up recently. A solid jump in its first-quarter revenue tells me this one's here to stay.

Is the fear justified?
So what's behind Solazyme's shares shedding 32% since April? No, it isn't production hiccups or other internal issues. It's the fear of the company losing major customers like the U.S. Navy because of high fuel prices. The Navy is shelling out four times the cost of regular jet fuel for the jet fuel they buy from Solazyme. How long anyone can afford such costly fuel is the question.

But then, two points need to be noted here. One, the use of oil as jet fuel is just one of the many streams Solazyme can draw revenue from. It can tailor the use of oils for food and cosmetics as well. Its beauty product line, Algenist, is in fact doing brisk business.


Two, it is ramping up production aggressively -- a move that should help bring down costs in a big way. Some of its moves include expanding its plant at Peoria, Ill., which is also one of its biggest facilities, and setting up a commercial facility next year. The company successfully negotiated with feedstock partner Bunge (NYS: BG) last month to enter into a joint venture to build a facility in Brazil with an annual capacity of 100,000 metric tons. This, of course, is a big breakthrough for Solazyme.

Got to buck up!
Ramping up production was a necessity anyway considering the huge deliverables Solazyme has to meet in the next couple of years under various agreements. The latest is the one it got from Dow Chemical (NYS: DOW) . The two were already conducting joint research, but the partnership took a leap recently when Dow decided to use Solazyme's microbe-based oils for its dielectric insulating fluids used in electrical equipment. It has agreed to buy all its oil requirements in the next few years from Solazyme, which could be as much as 60 million gallons by 2015.

Another agreement worth mentioning is the Letter of Intent it signed with United Continental (NYS: UAL) some months back to supply up to 20 million gallons per year of renewable jet fuel starting in 2014.

These agreements prove two things. One, Solazyme's innovative concept is attracting more and more customers, and two, it has partners who believe in its long-term potential. This is also reflected in its top line, which has grown consistently in the past three years.

Better than the rest
Solazyme's first-quarter revenue surged a whopping 75% from the comparable period last year, thanks largely to higher revenue from research and development programs.

Solazyme also looks better off than most other alternative fuel players. Amyris (NAS: AMRS) , for instance, produces lubricants, polymers, and fuel by turning sugars into hydrocarbons. But its technology may not find use in as many industries as Solazyme's oils can. Solazyme's oils also seem more flexible compared to Gevo's corn-to-isobutanol technology meant for jet fuel and synthetic rubber. And Kior, which can convert biomass into gasoline and diesel, hasn't started operations yet.

The Foolish bottom line
So what if Solazyme has red ink all over its books. It has a proven production process, it is scaling up rapidly, and it boasts of a long list of partners. I really don't see a reason that the stock shouldn't be a part of any long-term investor's portfolio. And with the stock off more than 60% from its 52-week high, the time is just right.

As exciting as Solazyme's innovation is, one thing's for sure: Our reliance on oil isn't going anywhere soon. If you'd like to learn how to profit from rising prices at the gas pump, I suggest you check out our special free report: "3 Stocks for $100 Oil." You can get the report today, for a limited time, absolutely free!

At the time this article was published Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Solazyme. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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