NEW YORK ( TheStreet) -- This Friday's planned IPO of biofuels company Solazyme ( SZYM) is getting a lot of attention. Is it just a good short-term green energy-IPO euphoria trade, or a good long-term investment opportunity? There's evidence from recent IPOs in the green energy space that, in the least, the Solazyme deal could be a good short-term investment. Two companies in the biofuels market went public in the past year that argue in favor of a post-IPO boom for Solazyme, Gevo ( GEVO) and Amyris ( AMRS). Gevo, which went public in February, is up 20% since its IPO. Amyris, which went public in September 2010, is up 75% since its IPO. The performance of these recent biofuel IPOs is reason enough for Solazyme to seize the day. Add the recent rise in the price of oil, which has stabilized around the $100 mark after a pullback, and the company has all the makings of a "buzz" offering. "It's not by accident that Solazyme is looking to do the IPO now," said Lux Research analyst Andrew Soare. Yet if green energy IPO euphoria has taught investors anything, it's that long-term growth, and sustainable stock market gains, have proven elusive in many cases. In the case of biofuels, the hit or miss nature of a nascent industry remains a key theme. As Lux Research recently noted in a mostly positive view of the biofuel segment growth opportunity, despite years of government incentives, financing, and "a graveyard of failed start-ups, the capacity of bio-based fuels and plastics in the ground today replaces only 3% of fuels and 1% of plastics." The data on the size of the biofuels market today is the key hurdle: "Even with all the attention from governments, investors and the public, bio-based fuels and materials only occupy a small percentage of total fuel and material consumption," Lux Research stated. There are some compelling biofuels market growth assumptions, nevertheless. Here are some of the optimistic data points from Lux Research on the biofuels market:
The global biofuel capacity will grow 7.8% annually to 53 billion gallons in 2015. Biofuel-based materials will soon grow faster than the opportunity in the fuel market, at 17.7% per year, to reach 8.1 million tons by 2015. The bio-based fuel market is $56 billion, and has grown more than 30% annually since 2005. The materials market currently totals $10.7 billion and has grown 10% a year since 2005. One IPO watcher told TheStreetTV that the Solazyme deal looks like an offering that deserves investor attention. "In the short-term, Solazyme and the other stocks in the group should do well, but there are lots of risks as they move closer to commercial scale," said Lux's Soare. "I expect hype will keep their stock prices up for at least the next few quarters," he added.
Here are 5 key questions about Solazyme as a long-term play that go beyond the recent surge in biofuel IPOs, and that highlight the Solazyme-specific business model as opposed to the generic biofuels market growth story.
Does the Solazyme IPO require a leap of faith today? Absolutely. This is not LinkedIn ( LNKD), where revenue can be generated at the flip of a switch. Solazyme needs to build up large-scale facilities with deep-pocketed partners in the energy, transportation and chemicals markets. What are the key difference between Solazyme and the other recent biofuel IPOs? Lux Research analyst Andrew Soare said that one key difference between Solazyme, and Amyris and Gevo, is Solazyme's genetically modified algae, sugar-fed model. The other recent biofuel IPO technologies were yeast-based, and as a result, better understood from a science perspective. "GMO algae has never been used at any commercial scale so there is certainly a risk factor in the ability to scale up cost effectively," Lux Research's Soare said. How important are Solazyme's partners to its success? Solazyme has lined up some impressive partners which breed confidence in its ability to execute, most prominently the U.S. Navy, Dow Chemical ( DOW) and Chevron ( CVX). Companies like Dow and Chevron understand the importance of finding alternative biofuels feed stocks, but these companies have several different technologies they are testing. "If Solazyme tanks, it's not like the biofuels platform tanks for one of these prominent partners," said Lux Research's Soare. "They are not handcuffed to Solzayme, but they do view the company as a promising one and want to help scale its operations." Solazyme also has a research deal with Unilever ( UL) for the personal care product market. Solazyme's skin care product lineup is also in a deal with Sephora and QVC. Can the personal skincare market really make a long-term case for Solazyme if the transportation market doesn't happen? The wide-range of applications for Solazyme is an advantage, even if it is unable to hit a low-cost point versus the traditional fuel commodity market, yet saying it's the roadmap to profitability remains a stretch. Cosmetics is a short term revenue buffer, which is higher margin and lower volume. "By selling into these markets Solazyme can help travel down its roadmap to commercial scale, and then approach the fuels and crude oil replacement story. "Investors aren't catching on to this story as a lipstick provider, but it's important to note that while it seems trivial to talk about cosmetics, while they scale up to produce a commodity oil at competitive commodity price, selling at higher margins is important," Soare said.
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