Amyris Q4 2022 ER Digest
Update
Edited by Brian Birnbaum.
As expected, Amyris continues to flirt with bankruptcy. The company burns whatever cash it can get its hands on quarter after quarter and continues to misguide investors on all kinds of metrics. It somewhat reminds me of my time as an entrepreneur. Back in 2017 I was building a business that required a large degree of experimentation. My investors wanted to see me executing in a linear and predictable manner, but the truth is that there was no comfortable or predictable way to get the job done, least of all without spending cash.
Amyris continues to push forward the frontier of science whilst trying to make business sense out of it, but investors want to see it being managed like a blue chip company. In 2017, I was building a P2P parking start up. These guys are building a platform that could bring material abundance to the world.
I have mixed feelings about Melo. On the one hand, I would love to have a CEO that could under-promise and over-deliver, but then I see the company make meaningful progress in the areas that really matter. Moreover, no one else in the industry is even close to their pace of innovation.
As a CEO back in 2017, I had to get everyone really psyched about what we were doing. In a world of infinite distraction, the lowest noticeable threshold required to attract product attention seems to be max excitement on the part of potential customers. And once you get everyone pumped, things can then work out or fail, but the former is a necessary condition for things to work out. It is very hard be the person that gets everyone excited, but is also able to somewhat predict the future on a quarterly basis.
The reason I initially invested in Amyris is because if it did not exist, I would probably be trying to build it myself now. I believe that harnessing the power of biology to create new things will greatly improve the human experience and, in turn, generate inordinate amounts of wealth. Thus, my mindset is different as compared to my other investments. As I have discussed many times since the inception of the investment, I have allocated a small % of my portfolio to Amyris and I am happy to risk losing the capital permanently, because the upside is so large.
This is in fact the same mindset that led to me to investing in AMD in 2014. I knew that 10 years on we would need a lot more computation for less and saw that AMD had great potential. It was a small investment and the risk of losing it all was high (the market left the company for dead back then), but now it has given me the freedom to pursue my interests full time and, to my surprise, become a writer too. Since I invested in the company, I just kept on asking myself the same question: are these people delivering more computation for less?
To a man with a hammer, everything looks like a nail. Investors are subconsciously trained to scrutinize management on quarterly objectives, an analytical process that has notable benefits. Like other society-wide habits that are generally beneficial, however, if you do not blindly adhere to the religion you are automatically labeled as evil or dumb. Nonetheless, when the company in question is fundamentally unique in nature, that analytical process becomes useless; you’re using a hammer to drive a screw home through a washer. To a company that is working on bringing synthetic biology to the world, quarterly estimates and performance tends to be more of a distraction. The real concern is, can they bring synbio to the world at all, at some point at least?
If we take Melo out of the equation for a second (and I would much rather have Elon Musk running this company), what is the situation with Amyris really? To succeed from here, the company has to do two things:
Achieve critical velocity in the top line.
Bring its costs under control, by vertically integrating and aggregating cumulative efficiency gains.
Once it does, this is the first company in the world to have figured out how to reprogram cells to make stuff, at scale and profitably, in a world where we either do not have enough of something or if we do, we are polluting the planet in order to get it in the first place. So, AMD-style, facing the bankruptcy dragon full-on, the question I keep asking myself is: are these people making it happen or not? My take is that they are and that is why I doubled the number of shares that I own recently. The cash burn is reckless and the guidance is poor, but Melo is actually making it happen.
I personally am not attached in any way to Melo. If you bring me a CEO that can achieve feats like the below on a regular basis while also guiding investors smoothly and not spending cash like he does, I would be more than happy. But, the rest of the synbio industry is full of companies that also have one foot in the underworld and achieve little to nothing, despite their allegedly more “prudent” managers which the market likes to pat on the back. Beyond Amyris as an inherently asymmetric bet, if it fails, I can take what I have learned with me to the next synbio leader. About Melo´s/Amyris´achievements this quarter:
The top line seems to be advancing well towards critical velocity. Most importantly, the company is now obtaining “$2 of revenue per every marketing dollar invested”, while during the first half of 2022 it was obtaining less than 1$ of revenue per every marketing dollar invested. This is notably more efficient and paramount for the company to achieve profitability. According to Melo, this newfound efficiency has much to do with the seemingly incoherent acquisition of MG Empower.
Melo says the company will hit $3 of revenue per $ of marketing in 2023, but in the context of the asymmetry, who cares as long as it keeps going up?
The above achievement is mirrored by what seems to be an accelerating efficiency curve throughout the organization.
Melo has cut 30% of his direct reports.
Consumer direct gross margin increased 600 bps over the fourth quarter of 2021.
Inbound air shipping has gone down from $12.7 million in Q3 to just $3.5 million in Q4.
Barra Bonita has thus far improved COGS for Biossance by 50%. This part is truly phenomenal.
Amyris now plans to concentrate its brand portfolio and stick with the top 6 brands (the company currently operates 10). This will enable it to use its resources more efficiently, versus spreading them out and allocating them to brands that have not achieved escape velocity yet and that may not do so.
So, are they making progress towards a scenario in which the top-line surmounts the cost base? Yes. Is it guaranteed that it will happen? Certainly not. However, I still see the world unknowingly converging onto the company. Everyone out there is making promises of sustainability to their customers that they cannot fulfill, because chemistry is inherently polluting. Only Amyris holds the solution at this stage and the recent transaction with Givaudan seems to be pointing at this: it represents more than 3x the value versus our other strategic molecule transactions, like those completed in the past with the company DSM.
Amyris is also in conversation with “one of the world´s top sugar producers,” who is interested in using Barra Bonita in exchange for funding the next facility. This sort of arrangement, if it were to proliferate, enables Amyris to infuse its manufacturing with a capital-light approach that would greatly accelerate its progress. A lot of consumer-facing chemistry companies are going to want in and this could kickstart the flywheel.
Why won’t this company just die? Because Amyris is a cockroach. It has been trundling in the mud for 13 years since its IPO, and I’m not complaining so long as they keep on keeping on. Today’s most notorious successes in the stock market have actually taken decades to build and Amyris’s resilience is somewhat underappreciated. Incremental efficiency gains in their top line and cost base, together with the world pivoting towards sustainable molecules is likely to at some point yield outsized returns.
As mentioned above, scrutinizing management on a quarterly basis has its benefits. Accountability helps companies stay fit. However, in earlier stages, it often constrains investors to a superficial perspective, concerned with more conventional financial metrics that don’t apply to a long-form startup. So long as Amyris does not die, and continues to progress fundamentally, the asymmetry of the thesis remains.
Until next time!
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I wonder what % of your investments would be acceptable for what i view as a good assymetrical punt. I have approx 0.65% allocated at the moment and am down nearly 40% on it. My worry is further upcoming dilution. I want to raise it to about 1 to 1.5% eventually, thoughts? too risky?