Hype is a great product in the short term, but it's pretty expensive. When Amyris (AMRS +0.00%) reported second-quarter and first-half 2020 operating results, it directed investors to a handful of cherry-picked metrics. But the reality is a little different -- and the stock chart reflects that.
There were tangible signs of progress for a second straight quarter. For instance, product revenue continues to grow with high-margin online sales, while a sizable stock offering allowed the company to reduce debt 40% since the end of 2019.
But Amyris is still relying too much on rosy projections (which have rarely been met in its history as a public company) and adjusted numbers calculated for convenience. Here's what actually matters to investors in the latest operating results.
Image source: Getty Images.
By the numbers
Amyris is an industrial biotech company that engineers microbes to manufacture chemicals and materials such as cosmetic ingredients, food ingredients, and fragrances. The company is finally beginning to realize that the most profitable use of synthetic biology today lies in consumer brands, not the collaboration-revenue business model it has leaned on for the last five years. Many peers are still mistakenly pursuing the latter, so Amyris deserves some credit for the transition.
The consumer-first strategy has flashed signs of potential. In the first quarter of 2020, Amyris reported a healthy 33.9% product gross margin on $17.8 million in product revenue. That helped to shrink the quarterly operating loss to "only" $32 million (bad, but it was trending toward breakeven at least).
In the second quarter of 2020, Amyris reported $25.2 million in product revenue, a 41% increase from the first quarter. The company doesn't delineate how much revenue comes from high-margin consumer brands and how much revenue comes from bulk sales of ingredients, so investors have to be careful with broad interpretations of progress.
Indeed, second-quarter product gross margin shrank to just 8%. That's better than a negative product gross margin (the historical trend), but it suggests contributions from consumer brands are still too small to make up for unfavorable shifts in product mix.
That's frustrating for investors who were hoping to see consecutive quarters of progress. It's not the only source of frustration in first-half operating results.
|
Metric |
First Half 2020 |
First Half 2019 |
YOY Change (Decline) |
|---|---|---|---|
|
Renewable product revenue |
$43.0 million |
$24.0 million | 79% |
|
License and royalty revenue |
$6.2 million |
$41.1 million | (85%) |
|
Grant and collaboration revenue |
$9.9 million |
$11.9 million | (17%) |
|
Total revenue |
$59.1 million |
$77.1 million | (23%) |
|
Cost of product revenue |
$34.9 million |
$32.8 million | 6% |
|
Product gross margin |
18.8% |
(36.7%) |
N/A |
|
Operating income (loss) |
($72.4 million) |
($51.9 million) |
N/A |
Data source: Press release. YOY = year over year.
The tone of the second-quarter 2020 earnings press release doesn't quite match reality, although the movement of the small-cap stock comes close. For instance:
- Amyris reported its highest first-half operating loss since 2012.
- The company reported a record first-half net loss.
- It reduced debt 40% in the first six months of 2020, but the company's book value has improved from negative $255 million at the end of 2019 to negative $64 million at the end of June. Most of the debt reduction was made possible by diluting existing shareholders.
- Amyris highlighted nonrecurring sources of revenue in 2019 (when it boosted year-over-year comparisons), but made special tables to exclude nonrecurring sources of revenue in 2020 (when it hurt year-over-year comparisons).
Investors also need to pay special attention to a worrisome accumulation of deferred-cost-of-product revenue related to the company's zero-calorie sweetener ingredient. Typically, the cost of a product is expensed on the income statement when the cost is incurred. Amyris is for some reason deferring those costs for its Purecane sweetener brand, which redirects the expense to the balance sheet.
In Securities and Exchange Commission filings, the company explains it will move the expense from the balance sheet to the income statement as Purecane products are sold. But management has also said zero-calorie sweeteners will be the second-largest source of revenue in 2020.
That basically leaves two possibilities: The product isn't selling, or Amyris is using some accounting tricks for the expense. The latter would suggest encouraging trends in product gross margin aren't legitimate -- and it wouldn't be the first time accounting inconsistencies have struck the business.
Amyris either has to expense the balance-sheet line items to the income statement (hurting product gross margin) or write them off (increasing losses). At the end of June, the total current and noncurrent deferred-cost-of-product revenue reached a record $22 million. That alone would be enough to wipe out product gross profit for the entire year. Investors need answers.
Guard your portfolio against technological hype
The internet is a noisy place. Already in 2020, Amyris has been called "the next Tesla," "the next great pot stock," and "the comeback stock of the year." Those who can competently analyze the business, technology platform, and market fundamentals know none of those statements are true.
While there are tangible signs of progress for the business, there's still a long way to go before Amyris finds itself on sustainable footing. Investors need to see several consecutive quarters of positive trends in product gross margin, receive detailed answers on deferred-cost-of-product revenue balance sheet items from management, and see if the company can actually deliver on full-year 2020 guidance before seriously considering a position in this synthetic biology stock.
