Solazyme Has a Political Problem

This article is part of our Real-Money Stock Picks series.

Alternative energy company Solazyme (NAS: SZYM) has a bit of a political problem. Its clean energy reputation has given politically motivated pundits a target that starts with the letters "SOL." Over recent history, critics seem to make frequent -- and in my opinion, unreasonable -- comparisons to bankrupt solar company Solyndra, which failed despite hundreds of millions in taxpayer-funded stimulus support.

The Solyndra comparison crops up frequently as these attention-seekers try to find another poster child for irresponsible government intervention in the marketplace. However, using Solazyme for the sake of this political argument is unfair and overblown.


Reality check
First of all, Solazyme isn't even a solar company. Solazyme produces oils from microalgae.

More important, Solazyme may be a start-up, but what it actually owes to the government pales in comparison to Solyndra's bill. Although Solazyme has received some government funds, there's a huge difference between the $22 million grant Solazyme received in 2009 and the half billion in loan guarantees doled out to Solyndra despite allegations that its existing financial instability was known and failure foreseeable.

Still, the political talkers and commentators like to make a mountain out of a molehill where Solazyme's concerned. One critic railing about government funding for clean energy recently contended that Solazyme relies on a government "lifeline" and implies its financial instability is forcing it to find other uses of its oils beyond clean energy to "survive" because it has been posting annual losses. This strikes me as rhetoric, and a pretty lame argument coming from someone defending a pro-market approach.

Solazyme's doing what any young start-up company should attempt to do: It's seeking out other uses and potential revenue channels for its products. The fact that it's been posting annual losses actually isn't unusual for newly public companies, as dangerous as protracted lack of profitability may be.

Hey, remember Amazon.com (NAS: AMZN) ? It wasn't yet profitable when it went public in 1997, nor was there any guarantee it would become the amazing business success it is today (or even succeed, for that matter). Amazon didn't post a quarterly profit until 2002, in fact.

Critics also tend to forget that Solazyme already has some pretty powerful partners in the business world. The company has inked joint development agreements with companies like Dow (NYS: DOW) and Bunge (NYS: BG) , for example, and Chevron (NYS: CVX) produced research funding through June 2012.

As far as ancillary business goes, Solazyme's Algenist skincare line is available in venues like Sephora and J.C. Penney, and the company's looking into uses for its oils as additives in food. It's also repeatedly partnered with Unilever for R&D collaborations into making soap and other products.

Of course, one of the best-known (and most controversial) deals Solazyme has is with the U.S. Navy, through which it received part of a $12 million contract for biofuel.

Solyndra really was SOL
Solazyme's definitely risky, like all innovative start-ups are, but it's no Solyndra. Solyndra filed for an IPO, which it later withdrew, but going public was one of its avenues to the funds it desperately needed. It made a few things clear in its IPO filing, such as how much it needed additional funding for its second manufacturing facility. It also already had substantial debt -- $141 million -- even before the half-billion-dollar loan from the Department of Energy.

Add in the fact that the solar industry overall went into a massive tailspin due to global austerity measures and highly subsidized, low-priced Chinese rivals, and indeed, that's a disaster in the making.

Solazyme may face an uphill battle to bring its products anywhere near mainstream and large volume, but here's another thing to like about the company: It didn't come right out of the gate with a boatload of debt. It owes $17.6 million and has $218.7 million in cash on its balance sheet.

The allegations that some government funding may relate to preferential treatment for some companies over others is certainly distressing and reprehensible. However, while critics contend that Solazyme had ties to an energy advisor that served on President Barack Obama's energy team, Solazyme executives have pointed out that their relationship with the federal government dates back to the Bush Administration.

Fair's fair
I like Solazyme despite the government help, not because of it; I've purchased Solazyme shares twice for the real-money stock portfolio I'm managing for Fool.com because of its potential to help create a cleaner, greener future. Meanwhile, that relationship is a boon and a risk: If government funding dries up for clean energy, things will become far more difficult for Solazyme and many of its rivals.

Still, Solazyme is an innovative company, and if its efforts are successful, future growth and profits could be huge. Meanwhile, the political chattering class should really leave Solazyme alone unless they're also willing to take on other targets of government handouts they apparently view more warmly. Take big oil, which is extremely well connected politically and enjoys many tax breaks and subsidies that are said to represent between $10 billion and $40 billion annually.

Fair's fair, after all.

At the time this article was published Alyce Lomax owns shares of Solazyme in her personal portfolio. The Motley Fool owns shares of Amazon.com and Solazyme. Motley Fool newsletter services have recommended buying shares of Amazon.com and Unilever. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Introduction to ETFs

The basics of Exchange Traded Funds and why ETFs are hot.

View Course »

Finding Stock Ideas

Learn to do your research and find investments.

View Course »

Add a Comment

*0 / 3000 Character Maximum

1 Comment

Filter by:
Algae Observer

Solazyme has a very interesting business model. I like the way they adress future markets while generating cash flow from recent opportunities. This might be the keys to success even if the technology is being discusssed due to the dependancy on sugar...

June 14 2012 at 4:49 AM Report abuse rate up rate down Reply