Quadrupling Down!!!

On the SZYM board, I just read someone say with glee that he had quadrupled down. I just had to post this to warn people, and thought it would be useful for our board as well. Before anyone quadruples down, make sure you are thinking it out: How are they going to make money? Make a profit?

Here’s the story: Last quarter SZYM had $9 million in product revenue, and cost of sales was $6 million, so they made a gross profit of $3 million on their sales. Roughly gross margins of one-third, which isn’t bad. However their SG&A and R&D come to $40 million!!! (I’m not counting $3.5 million in restructuring charges or $5 million in research grants because that’s not what this is about). So think: Gross Profit $3 million, Operating Expenses $40 million!!!

They were pleased because Revenues were up 29% year over year. But, with those gross margins, even a 1000% increase in product revenue (10-times increase) wouldn’t bring them close to break-even!!! It would bring in $30 million more after cost of sales, but they’d need $37 million more to break even.

EVEN IF they got their Gross Margin up to 40%, they’d need $100 million in product revenue PER QUARTER to cover present operating revenue. To just break even. Not make a profit. That’s still over 1000% increase of what they have now. If they compound 30% a year growth, it would take them 10 years to get to $100 million per quarter in product revenue. And that’s assuming no increase in operating expenses (SG&A and R&D). (Who are you kidding? Ten times as much revenue and no staffing increases, no pay increases, etc?). Even that wouldn’t bring them to actual break-even.

By the way, that’s why taking the Brazil plant out of the equation was such a game changer. That was where they were going to get the 10 times more volume to enable them to break even. Without it, the premise is really changed. It’s a long way until they make any money. Think about it before you quadruple down!

And, for all of you on this board, with any stock that has gone down a massive amount, don’t assume the market is just stupid. Before you double down, or triple down, think how will the new news change things for the company. Is the premise actually changed (or did they just have a poor quarter because it snowed a lot, for instance)? This doesn’t mean it is guaranteed to be a bad investment! Solazyme could get their Brazil plant straightened out before they run out of money, or may be able to dilute by selling more stock to raise more cash to cover their losses, but they may not.

Best,

Saul

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I joined HG recently, got a good deal for a two year subscription.
As part of joining HG they had a couple of special reports and stock recommendations,

  • BOFI - I took a starter position
  • LNKD - Currently I think it is overpriced, if there is a pullback I would get a small position.

and SZYM. The report lists SZYM as risky,
“…Solazyme right now is more an investment in a process than in a product…”
“…investing only the sum of money you’d be OK with losing entirely — and plan to hold the stock for at least five years.”
I did some research, saw the thread here
http://discussion.fool.com/solazymes-earning-miss-31486948.aspx?..
and gave it a pass.

Kris

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