If you check the summary page for Amyris Inc. (AMRS, Financial) at GuruFocus, you'll find a lot of weak metrics. That includes ratings of 1 out of 10 for both financial strength and profitability. Obviously, this is a stock we should avoid.
Or should we? What we have here is an early-stage tech company that threatens to become a major disruptor.
About Amyris
Based in Emeryville, California, this $5.11 billion company was founded in 2003 and began publicly trading in 2010.
It specializes in synthetic biology. By way of explanation, the company reported in its 10-K for 2020 the example of a premium emollient used in skincare formulations:
"We believe that synthetic biology represents a third industrial revolution, bringing together biology and engineering to generate new, more sustainable materials to meet the growing global demand for bio-based replacements of petroleum-based and traditional animal- or plant-derived ingredients."
Traditionally, the source of this emollient has been squalene, sourced from the liver oil of deep-sea sharks; to get this oil, it has been necessary to kill sharks, a practice that is under fire in many areas (it was banned by the European Union in 2010, for example).
Because of the source, squalene has been in relatively short supply and consequently expensive. That meant its use was restricted to high-end cosmetics.
Using yeast fermentation processes, Amyris has been able to convert a sugarcane compound into shark-free squalene, which is known as squalane ("a" replaces "e" in the second syllable). It said, "With our ability to produce a reliable supply of low-cost squalane that eliminates the need to harvest shark liver oil, we offer this ingredient at a price that we believe will drive adoption by formulators."
It also explained:
"We apply our proprietary Lab-to-Market biotechnology platform to engineer, manufacture and market high performance, natural and sustainably sourced products. We do so with the use of computational tools, strain construction tools, screening and analytics tools, and advanced lab automation and data integration. Our biotechnology platform enables us to rapidly engineer microbes and use them as catalysts to metabolize renewable, plant-sourced sugars into high-value ingredients that we manufacture at industrial scale. Through the combination of our biotechnology platform and our industrial fermentation process, we have successfully developed, produced and commercialized thirteen distinct molecules used in formulations by thousands of leading global brands."
Squalane is one of the commercialized 13 molecules. Business growth depends on the number of molecules it can produce and how well each one is commercialized. This slide from the company's March 2021 Investor Presentation shows how the pipeline has grown:
Competition
The company reports it faces competition in each of its three reporting segments:
- Health & Wellness: Suppliers with significant chemistry knowledge make many of the active ingredients in the nutraceutical market. In the food ingredients markets, it competes with "companies that produce products from plant- and animal-derived sources as well as with companies that are also developing biotechnology production solutions to produce specific molecules."
- Flavor & Fragrance: Products in this segment compete mainly with products from plant and animal sources, as well as from chemical synthesis. Amyris believes conventional products, from plant and animal sources, are generally more expensive, of lower purity and less sustainable than its products.
- Clean Beauty: Again, it competes with ingredients sourced from plants and animals, and it considers those products to be higher cost, lower in purity and have a greater environmental effect than its own products.
For each segment, Amyris notes that other companies are trying to develop products similar to its own.
Its competitive advantage lies in the intellectual property it has created or purchased. In the 10-K, it noted that at the end of 2020 it held 695 American and foreign patents as well as 220 that were pending (including those that are co-owned or licensed to Amyris).
Recent results
In its fourth-quarter and full-year 2020 earnings release, the company reported top and bottom-line improvements. This table shows how underlying (presumably sales revenue) grew while other (presumably non-recurring items) remained about the same:
The adjusted net earnings loss improved by $16 million to -$151 million in 2020.
The GAAP loss per share was reduced from $2.67 in 2019 to $1.88 last year.
In the release, President and CEO John Melo noted:
"The Amyris team made significant progress in 2020 on our strategic initiatives. We delivered six new ingredients at scale, completed a successful $200 million equity financing and significantly reduced our total debt. With the momentum in our product revenue we believe that we are well positioned to continue to drive sector leading growth into the future."
Looking ahead to full-year 2021, the company expects total revenue to increase by about 35% in the first half and 65% in the second half. In dollar terms, it expects total revenue for 2021 to reach about $400 million (compared to $173.1 million in 2020).
It also expects its debt to be reduced below $100 million by the end of 2021, compared to $171 million at the end of 2020.
At least one acquisition is planned for this year, and it should be "mostly accretive."
Risks
A principal risk has already been implied; intellectual property is at the core of the company's business and competitive position. Any failure to keep growing its intellectual property, or to enforce infringements, might devastate Amyris.
On the other side of the coin, the biosynthetic cannabinoids company Lavvan Inc. filed an $881 million lawsuit against Amyris in September 2020. The two companies had signed a research, collaboration and licensing agreement in 2019, but Lavvan alleges Amyris decided to become a direct competitor, rather than a partner, using Lavvan's patents and trade secrets. Amyris denies the allegations and promises to mount a vigorous defense.
It is a relatively small player in the health, flavor, fragrance and clean beauty industries. In the latter case, for example, it competes indirectly with giants such as Proctor & Gamble Co. (PG, Financial) and Estee Lauder Companies Inc. (EL, Financial).
Investors should beware of dilution caused by new equity issuances; as noted above, the company issued $200 million worth of new shares last year. Technology companies often need large blocks of capital to continue their growth and there is a possibility more of them will be issued in coming years.
Financial strength
The first place we look for trouble financially is in debt, and that appears to be the case for Amyris:
On the broader assets versus liabilities front, the company made progress in 2020, despite the pandemic:
- Total assets grew from $161 million at the end of 2019 to $222.8 at the end of 2020, a 38% increase.
- Total liabilities declined from $411.1 million in 2019 to $389.9 in 2020, a reduction of 5%.
The Altman Z-Score reflects the company's current financial viability, with a score in the distress range. However, we saw above that Amyris was able to raise new equity and reduce its debt in 2020, leading to the conclusion that the company remains a going concern. That's a fit with the thesis that this is a growing technology company.
Profitability
Again, a dismal rating, so we will take a deeper look. The operating and net margins have been relatively consistent for the past few years, but that's not good when they are negative:
Revenue has generally been headed upward, with one exception, for the past five years. However, revenue per share has remained flat:
Surprisingly, given the revenue profile, Ebitda has fallen seriously, but Ebitda per share has been steady:
Yet another profile emerges when we observe earnings per share over the past decade:
Again, an upward trend within negative territory.
Finally, is the company generating enough cash flow to expand revenue in the future? No, it will need to depend on equity and borrowed cash for some time to come:
Dividend and share buybacks
No dividend and, as we have seen, the company continues to issue new shares.
Valuation
The GF Value Line finds the stock to be highly overvalued because of the recent run-up in its share price:
Since Amyris is losing money, many of the usual valuation metrics are unavailable. One of the few available is the price-sales ratio, which shows investors need to pay $22.57 for each dollar of sales. That's far above the chemicals industry median of 1.53.
Some investors apparently like its prospects; over the past year, they have bid up the price from around $2 to more than $22 before pulling back in the past few weeks:
Ownership
None of the gurus held positions at the end of 2020, and none have since 2019.
As the following chart shows, institutional investors own 27.1% of Amyris' shares, down from the last year:
At the end of 2020, the three largest institutional holders were Farallon Capital Management with 17,500,000 shares; FMR LLC with 16,435,595 shares; and Vivo Capital LLC with 13,161,847 shares.
Conclusion
Amyris is a stock for aggressive investors hoping to catch a potentially big wave in the future and reap the kinds of rewards that come to successful disruptors.
But will Amyris become a successful disruptor? The business' technology and operational sides seem to be making progress, but this remains a high-risk stock because of its ongoing search for profitability, not to mention the large lawsuit that hangs over its head.
Results from 2020 suggest the company is going in the right direction, and if it hits or beats its 2021 targets for revenue and debt reduction, it will erase a great deal of doubt about its viability. For now, it appears best to watch and wait.
Disclosure: This article is part of my research into using Amyris stock as part of an options collar, a structure in which an investor buys put options to protect the downside and sells a call option that provides income. Thus, I may buy stock in the next few weeks.
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