Softbank-Backed Zymergen (ZY) Crashes Over 70% as CEO Departs, Product Revenue Not Possible in 2021 and 'Immaterial' in 2022, At Least 6 Firms Downgrade

August 4, 2021 7:14 AM EDT
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Price: $13.87 +0.87%

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Shares of Zymergen (NASDAQ: ZY) are down more than 70% in pre-open Wednesday after the company said it no longer expects product revenue in 2021, while the same will be “immaterial” in 2022.

“During the quarter, several key target customers encountered technical issues in implementing Hyaline into their manufacturing processes typical of new product and process development learnings. The Company has made significant progress towards addressing these challenges and believes there are no intrinsic technical issues with Hyaline. However, this issue has resulted in a delay in the Company’s commercial ramp. Zymergen is working to strengthen its commercial team to ensure the reliability and robustness of the sales pipeline qualification and forecast processes,” the company said in a statement.

For the quarter to end June, ZY is projecting sales between $5 million to $6 million from R&D services. The company reported cash reserves of about $588 million.

Furthermore, the company announced it reached a “mutual decision” with the current CEO Josh Hoffman for him to step down, effective immediately. Jay Flatley has been appointed Acting Chief Executive Officer.

“We are disappointed by these developments, and the Board and management team are focused on resolving the underlying issues to ensure Zymergen moves forward as a stronger company with a compelling operating plan,” said Jay Flatley, Acting CEO and Chairman of the Board.

Zymergen went public in April after selling shares at $31.00 apiece before the stock soared to $48.50, valuing the company at $4.8 billion. The company previously attracted over $1 billion from private investors, including SoftBank, True Ventures, and DCVC. Through its IPO, ZY raised a further $500 million to initially value the company at $3 billion.

Wall Street had high expectations for ZY’s only product - Hyaline. A transparent, durable, and bendable film is supposed to be a game-changer in the manufacturing process for consumer electronics products like foldable touch screen smartphones.

The SEC had questions about the company’s financial sustainability from the start. In March, ZY updated its IPO prospectus to note:

“We do not have our own commercial scale manufacturing capability. Currently we manufacture Hyaline and our other electronic films primarily in Japan but have established a (Contract Manufacturing Organizations) site for Hyaline in the United States. However, our U.S. CMO has informed us that we only have committed supply through the end of 2021.”

“If we do not find and qualify an alternate source of manufacturing, are unable to increase capacity at our existing manufacturer in Japan, or do not invest in our U.S. CMO to support and increase production, acquire our U.S. CMO or otherwise manufacture Hyaline and our other films products on our own, we may not have the manufacturing capacity required to meet our commercial needs after the end of this year.”

Following yesterday’s announcement, Goldman Sachs analyst Matthew Sykes downgraded Zymergen from “Buy” to “Neutral” with a price target of $12.00 (from $55.00).

"We downgrade shares of ZY to Neutral from Buy as we meaningfully reduce our FY21-23E revenue to reflect management’s announced delays to Hyaline’s commercial launch and potential resizing of the market opportunities. This follows Zymergen’s 8/3 business update about its commercial product pipeline and financial expectations,” the analyst wrote in a note.

Similarly, Cowen analyst Doug Schenkel to “Market Perform” from “Outperform” with no price target.

“While comments were made that suggest this is a market assessment/commercial execution problem, not an issue with the technology platform, we believe we have no choice but to downgrade to Market Perform pending more information,” Schenkel said in a note to clients.

On what may have gone wrong for ZY, the analyst further adds:

“Some key customers delayed the timing of orders and seemingly signaled demand would be lower for initial products and pipeline products. More broadly, it became increasingly clear that the company’s expectation for advancements in foldable screen technologies was too aggressive. Additionally, the company’s customer funnel was drastically reduced relative to the prior estimates.”

In addition to Cowen and GS, analysts at BofA, William Blair, JPMorgan, and HSBC also downgraded shares.

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