Dominant shares of narrowly defined de novo markets.
Both Amyris and Tesla have dominant shares of their more narrowly defined innovative sub-segments of their markets, "synthetic biology" and electric vehicles (EVs). Ironically, both companies have very small shares of their traditional broadly-defined markets (specialty chemicals and autos) but this has allowed them to gain an early lead in their fermentation-derived synthetic biotech and EV markets, respectively, generating rapid sales growth and dominance with surprisingly little competition from traditional industry participants who are technologically late to the market.
Both companies have already also established strong global positions and intellectual property in these technically demanding segments, not an easy undertaking. Large market shares and scale typically result in higher margins and the ability to support greater R&D and sales & marketing spend, growth from market share gains and a greatly enhanced likelihood of long-term success.
Already well up the production learning curve as a low-cost producer.
Amyris already has 10 diverse products in production generating revenues at low production costs vs. competition. This broad experience base will reduce production costs and execution risk for new molecules going forward. Reportedly, one private synthetic biology competitor, Gingko, has only 2 molecules in production.
Tesla has successfully ramped 3 distinct EV models over the last 7 years, developing and perfecting new EV production processes along the way, entering the most lucrative markets first. Its most important 4th model, the Model Y, a mid-size SUV, just began to ramp but got shutdown by COVID-19. With 70% of its parts in common with the Model 3 sedan and benefitting from Model 3 production best practices plus new design efficiencies and attractive features, the Model Y should enjoy higher gross margins. Meanwhile Mercedes and other competitors continue to struggle going up their production learning curves and with less efficient batteries in their EVs.
Extensive R&D pipelines point to over a decade of growth.
Amyris has researched 100s of molecules and generally maintains a fresh R&D pipeline of 20 of its most promising molecules. Amyris also has a special 20 cannabinoid molecule development program with a partner committed to pay Amyris up to $300 million in potential cash milestones. These cannabinoid molecules and the use of Amyris' new no-calorie PureCane sweetener for beverages and baked items offer perhaps the greatest upside potential but are not very large near term as they have just begun to contribute to revenues. Separate from the 20-molecule cannabinoid partner, Amyris is moving to incorporate its CBD and CBG cannabinoids into beverages/foods with established multinational partners and can be expected to add them to its own branded line of skin care products which could address the multi-billion dollar CBD lotions market.
Tesla has a pipeline of future products addressing the highest profit pool markets in transportation: Pickup Trucks, Semi-trucks and a new Sports Car. Tesla has just re-started production of its new Model Y crossover SUV and I believe it could double Tesla's revenues and earnings in the next few years. The widely acclaimed revolutionary stainless steel Cybertruck may be accelerated from its 2022 launch date and it could dominate the high profit margin pickup truck market due to its superior features and functions.
Superior products readily perceived by consumers create brand loyalty.
Amyris is delivering noticeably better performing and more pure products that already exist in nature. Instead of trying to extract materials from nature's soup which usually comes with impurities and can be very expensive to extract, Amyris identifies the desired molecule, then reprograms bakers' yeast DNA to directly produce the target molecule in its purest form as a byproduct when the yeast consumes sugar cane. Amyris then takes multiple steps to purify the product further. For example, Amyris' Reb M no-calorie PureCane sweetener is 95%+ pure and does not include the bitter aftertaste from residual impurities in the competing Stevia leaf extract versions of the Reb M sweetener.
The world's leading beauty cosmetic formulations used to include 2-3% squalene to help the skin maintain its moisture, youthful flexibility and smoothness. However, squalene is very expensive as it is extracted expensively from shark's liver and is not very stable. Most now use Amyris' close cousin, Squalane which is equally effective, has a longer shelf life and a lower cost. Amyris found that Squalane was so effective, it developed its own clean beauty line of Biossance skin care products with up to 100% Squalane. Biossance products are noticeably superior to consumers which is why it is the fastest growing line at Sephora and is growing over 100%/year with little advertising.
Addressing the rapidly growing cannabinoid market, Amyris has said it can produce CBD that is more pure and at a fraction of the cost of farm grown CBD currently on the market which is extracted from hemp and is less pure and can be inconsistent.
Tesla's vehicles have noticeably superior driving performance inherent with electric motors that deliver instant torque and rapid acceleration with far fewer moving parts and much lower maintenance costs. Tesla has infused its products with technology and software that make them twice as safe and more valuable to consumers than internal combustion vehicles - and consumers can sense this easily from a test drive with no need for expensive advertising.
Will benefit from repetitive "Moore's Law" improvements ahead.
Just as semiconductors double the number of transistors on a chip every 2-3 years to deliver more value, Amyris continuously improves design cycle times and can create improved yeast strains resulting in higher yields at lower costs and improved purity with each new strain generation. This results in noticeably better performing products and cheaper production costs for existing molecules over time as well as for newly introduced molecules every year.
Similarly, Tesla continuously improves the design, batteries, electronics, sensors, software and materials in its vehicles, as reflected in what I estimate was a 50% reduction in the cost of its batteries over the last 4 years. Tesla downloads improvements to its customers' vehicles every few months - for free, and I believe Tesla will keep upgrading its newest vehicles to make them "faster, better, cheaper" than the competition every year. It is important to understand that both companies use reiterative process improvements that create more value at lower costs every design cycle. I describe this process in my book, "Digital Deflation™." It has fueled Intel for over 30 years and should do the same for Tesla and Amyris.
Creating brands that connote high quality, clean and environmentally responsible products that resonate with consumers, particularly Millennials.
Amyris delivers cleaner and more pure sugar cane plant-derived versions of molecules already existing in nature. Tesla is delivering superior versions of clean (zero carbon emission) transport where consumers can clearly see the acceleration, pleasure to drive, lower maintenance, power regeneration and fuel cost savings vs. carbon producing Internal Combustion Engine vehicles. I believe that both companies will be able to command brand loyalty, higher market shares, sustainably higher profitability and higher market valuations over the long term as consumers and investors develop confidence in quality brands that help preserve nature and the planet.
Both companies have a history of falling short of optimistic forecasts.
Three years ago I encouraged Tesla to reign in Elon Musk's financial forecasts to levels they could beat every quarter and it appears they have been hugely successful. I have also encouraged Amyris to be more conservative in their financial guidance. If they are equally successful, it would build investor confidence in the company and remove another argument made by short sellers.
With very rapid double-digit revenue growth rates making inroads into mature industries and without long histories of profitability, both companies have been difficult for investors to value.
Tesla has been compared to GM (GM) and Ford (F) but I believe that its innovation and continuous improvement make it more comparable to Apple. Over the next 5 years Tesla is expected to grow earnings 35%/year or 3 to 4 times faster than Apple's 12% projected growth rate and deserves a higher P/E ratio. Amyris does not have a public comparable.
Amyris reported $152 million revenues for 2019 and yet has a public market value of only $547 Million and with net debt of $193 million (March 31, 2020), it has an enterprise value of $740 million or only 5 times last year's revenues. In contrast, private synthetic biology competitor Gingko Bioworks raised equity capital last year at a $4 billion market value which was at a valuation of 50 times its estimated revenues of $80 million last year. On 2020 guided revenues of $220 million, Amyris is valued at only 3.4 times revenues. I believe the Amyris business model is superior to Gingko's in that it leverages its new science plus old science solutions to introduce its own differentiated and branded products in certain end markets (B to C) as well as molecules to sell to partners as ingredients to develop and sell (B to B).
Amyris has successfully entered the fast growing, premium Clean Beauty skin treatment market with "Biossance," the Clean Baby market with "Pipette" and the pure no-calorie natural sweetener market with "PureCane." Biossance's closest Clean Beauty cosmetics competitor, Drunk Elephant, was acquired in 2019 by Shiseido (OTCPK:SSDOY) for $845 million or roughly 6.5 times revenues of an estimated $120-130 million. Applying a 6.5 price-to-revenue multiple on estimated Clean Beauty net revenues of $55 million for Amyris in 2020 would imply that Amyris' Biossance Clean Beauty business alone would have an implied value of $357 million versus the Amyris total company enterprise value of $740 million.
In two years, I believe that Amyris will be valued at a premium multiple of earnings which I conservatively estimate for 2022 at $0.58/share (untaxed) on $600 million of revenues.
How Amyris Differs From Tesla
Amyris is much smaller than Tesla, with about $220 million in revenues estimated for 2020 vs. Tesla's $27 Billion. Although Amyris is unlikely to catch up to Tesla in revenues anytime soon, we believe both companies are likely to grow to become considerably larger and more profitable in the next 5-10 years.
In Q3 2019 Tesla became surprisingly profitable and Amyris has yet to do so - importance of high incremental margins.
While we cannot know which quarter Amyris will turn a profit, I believe it will be in the next 3 or 4 quarters. When it does, Amyris has much higher gross margins than Tesla which will allow Amyris to grow net income much faster than sales once it bursts through break even. Amyris gross margins are over 60% for its Branded products and 25-50% for its Ingredients vs. a 20-25% gross margin for Tesla.
With high gross margins and revenue growth of over 50%/year, when Amyris revenues are large enough to cover its fixed costs, each incremental dollar of sales will add a higher incremental operating margin and lead to faster earnings growth. (For example, If Amyris delivers $50 million or 8% of upside surprise to estimated revenues of $600 million in 2022, I estimate the boost to EPS at a 44% incremental operating margin would add about 9 cents/share or 15% higher EPS, which would take untaxed EPS to $0.67/share in 2022.)
Tesla has already implemented expense control and capital efficiency programs. Amyris initiated expense controls last year and has yet to start major capital efficiency programs.
Companies undergoing rapid 100%/year growth can grow so fast that they become capital inefficient relative to self-funding their rapid growth rates. In its early unprofitable years Tesla was not able to self-finance its 70-100% growth rates. However, Tesla was able to buy the Fremont plant for pennies on the dollar and obtained low cost government financing/tax incentives to aid in its crucial start up years.
In the last two years, Tesla announced and instituted disciplined expense controls which have contributed to its profitability. More under-appreciated, Tesla has moved its Model 3 into a "negative working capital model" as championed by Dell (DELL) where it pays suppliers after it receives revenues upfront from customers. The upcoming Model Y should be more capital efficient as margins should be higher on higher selling prices. I expect that Tesla will be able to continue to obtain government assistance for future plants and together with greater efficiencies from scale, Tesla should be able to self-finance its future growth and generate significant free cash flow.
Amyris is a bit behind Tesla but I believe on the same path towards instituting cost efficiencies and greater capital efficiency to be able to self-finance its rapid future growth. I am encouraged that Amyris announced "an expected 2020 reduction in operating expense spend over 2019" as part of its effort to "achieve sustainable positive cash generation from our operations." Amyris mentioned on its last conference call that it has achieved 5 quarters in a row of scale, technical and process improvements and "will look to continue additional improvements" to its operations.
It is important to be aware that Amyris' 60% gross margins give the company a greater probability of achieving the 50% return on equity needed to self-finance a 50% growth rate long term (DuPont Model). Amyris achieved a 50% gross margin in 2019 and may reach 60%+ in 2020.
Due to COVID-19, ironically, most of Amyris' $90 million of Consumer sales this year are now being executed online which is similar to the Dell negative working capital model that produces net cash at time of orders, 30 days before they pay suppliers. Capital efficiency would benefit further to the extent revenue includes a richer mix of income from any new partnerships or other royalty-based arrangements which would require very little capital. In addition, any further debt paydowns will reduce high cost interest expense and accelerate time to profitability.
Beyond the next decade, Amyris' upside may be more open ended than Tesla's.
The Amyris fermentation science platform can be applied to a virtually unlimited number of molecules and end markets leaving its potential for new products virtually unbounded. In addition, Amyris has become more adept at finding new applications for its existing molecules. E.g., On March 6th, Amyris announced a "Major Breakthrough in CBD Delivery" which underscores the potential for Amyris to make science-based discoveries that could be disruptive to existing markets. A study by Nikkol Chemical demonstrated that Amyris' Squalane delivers 10-40 times the amount of CBD to the epidermis and delivers CBD faster than other currently used CBD oil carriers:
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Figure 1. CBD Measured in Skin Cell Fraction of the EpiSkin Model
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Table 1. Amount of CBD Delivered for Each Carrier Oil at Designed Time Points
We believe this new use of Squalane represents a significant opportunity for Amyris to sell Squalane fairly soon as a carrier for a multi-billion dollar existing market for topical CBD lotions.
Amyris also recently announced that Squalane's close cousin Squalene molecule is a superior "adjuvant" for vaccines and is being evaluated by pharmaceutical companies developing the standard annual flu vaccine and possibly as an adjuvant for a COVID-19 vaccine, though the later would depend on if one of their partners develops a successful vaccine. Amyris' squalene already has a proven track record as an adjuvant for Artemisinin malaria vaccine which has saved many lives worldwide.
Amyris can respond to new opportunities quickly and in 2 weeks developed a Squalane-supplemented Pipette family friendly hand sanitizer that offsets the harsh effects of alcohol by moisturizing the skin. Management said on its Q1 conference call it expects to do over $30 million in sales this year. I believe the phenomenal ramp of the hand sanitizer sales has already helped compress the maiden launch of the entire Pipette Baby branded product line from two years to two quarters.
Tesla, as of now is focused only on electric vehicles, solar power and power storage. Although we can rely on Elon Musk to think outside the box, we don't know what other new products might be coming down the road. We do know that Tesla is investing in full-self-drive, robo-taxis, utility scale power management and auto insurance.
Risks of Amyris Not Following In Tesla's Footsteps
Every opportunity comes with risks, and Amyris has several.
Liquidity risk: The greatest risk is that Amyris is not able to raise equity capital in the next few weeks or months to provide a comfortable margin of safety on its balance sheet to be able to pursue its many and growing new product opportunities. I believe that given the better than expected growth of its Consumer Brands and with so many attractive new growth opportunities, Amyris will be appealing to new equity investors.
Operating risks in a COVID-19 economy: Amyris has been able to produce products and build inventory in a difficult economy and it is actually benefitting from stronger than expected online demand for its products which carries higher margins and negative working capital. The new Pipette family friendly, moisturizing hand sanitizer is sold out, and based on use by my family and friends, I believe it will become a Best Seller in the months ahead.
Risk of further dilution: Amyris has been plagued by having to do repeated rounds of financings with warrant dilution and convertibles that create short selling opportunities. The earnings estimates in this report assumes the issuance of about 16 million shares to raise $55 million of new equity capital. This dilution will be offset by about 7 million warrants that are due to expire this month for a net dilution of about 6.6%. If the company raises more equity due to strong demand, so much the better in terms of having more cash cushion and more capital to accelerate growth.
Management and culture: Amyris' recent hiring of a very experienced CFO with multinational operating and financial experience rounds out a team of managers that have already demonstrated major accomplishments in Basic Research, R&D, Product Development, Operations, Consumer Brand Building and creating valuable partnerships. Tesla has had a more challenging, fast moving culture of rapid change and doing things differently and has been fabulously successful but with some turnover. Amyris has had a more academic and collegial culture. Both are very focused on making the planet a cleaner and better place and will be rewarded by their consumers for delivering on those goals.
Conclusion
The triggers for the beginning of a triple or quadruple in Amyris are most likely to be an "overfunding" equity capital raise, plus Amyris' first positive cash flow and profitable quarters. However, in the next 12 months, positive surprises might also come from greater than expected pipette branded family-friendly hand sanitizer demand, continued rapid growth at Biossance, commercial orders for producing CBD, CGB, and other cannabinoids, the use of squalane as a carrier for CBD lotions and the use of squalene as an adjuvant for delivering the common flu vaccines, and possibly for COVID-19 vaccines. The next three years will be driven by rapid revenue and earnings growth with purecane sweetener, pipette, cannabinoids, and other new molecules contributing in 2022 and beyond.
While the similarities between Amyris and Tesla are remarkable, the differences relate mostly to timing and size. I believe that a possible additional equity "overfunding" which I and others have recommended would remove any doubt about Amyris' finances, provide important optionality for its next phase of profitable growth and become a trigger for investors to focus on the company's tremendous future potential.
Tesla saw the beginning of a tripling of its stock price immediately after it reported its first big earnings surprise last October and then delivered two more quarters of better-than-expected earnings. We know that Amyris enjoys gross margins that are higher than Tesla's, so once Amyris becomes profitable, incremental earnings growth will be very rapid.
The timing of Amyris crossing breakeven is difficult to predict. However, I am confident that if Amyris does a new equity financing and if it can continue to grow revenues 50% per year, maintain gross margins over 60% and achieve working capital and operating cost efficiencies that in two years, by 2022, the company could deliver revenues of $600 million (up 57% vs. $381 million in 2021) and estimated untaxed earnings of $0.58/share fully diluted. Using a 21% tax rate, estimated fully taxed, fully diluted earnings would come in at $0.46/share in 2022.
In 2023, just three years out from now, revenues could come in at $864 million (up 44% from 2022), estimated EPS at a 10% tax rate at $1.07/share and estimated fully taxed earnings at $0.94/share. With a fully funded balance sheet and rapid revenue and earnings growth, Amyris should attract more institutional investors, Sell Side coverage and appropriate price discovery. With a premium P/E valuation of 25 times earnings, Amyris' stock could appreciate to $11.50/share on fully taxed EPS of $0.46 just two years out. This would be more than a triple, similar to Tesla's 6 month move following its 3rd Quarter 2019 earnings beat. Today, Tesla is trading at 70 times next year's earnings estimates (2021).
Looking out one more year to 2023, Amyris could possibly double again to around $23.50/share if it were to be valued at 25 times fully taxed, fully diluted EPS of $0.94/share in 2023. So, in three short years, Amyris shareholders could enjoy a triple, then a double and then be holding shares of a company that could deliver 30%+/year compound growth in earnings for many years to come.
Hopefully, Amyris will do an "overfunding" of its balance sheet very soon. Then it just needs to execute on its abundant opportunities.
Disclosure: I am/we are long AMRS, TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This report is not, and should not be construed as, a solicitation or offer to buy or sell any securities or related financial products. It has been prepared by me solely from publicly available information. The information contained herein is believed to be reliable but has not been independently verified. I make no guarantee, representation or warranty, and accept no responsibility or liability whatsoever as to the accuracy, completeness or appropriateness of such information or for any loss or damage arising from the use or further communication of this report or any part of it. Information contained herein may not be current due to, among other things, changes in the financial markets or economic environment. Opinions reflected in this report are subject to change without notice. This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. The report has been prepared without regard to the individual financial circumstances, needs or objectives of persons who receive it. The securities and investments related to the securities discussed in this report may not be suitable for all investors. Readers should independently evaluate particular investments and strategies, and seek the advice of a financial adviser before making any investment or entering into any transaction in relation to the securities mentioned in this report.
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