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Business Description
Origin describes itself as a “carbon negative materials company with a mission to enable the world’s transition to sustainable materials by replacing petroleum-based materials with decarbonized materials in a side range of end products…” Essentially, this is a fancy way of saying that Origin has developed technologies that allow manufacturers to replace plastics and other petroleum-based source materials with sustainable feedstocks made from materials like sustainably harvested wood, wood waste, cardboard, and agricultural waste.
We’ve all heard stories in the past about companies paying lip service to being environmentally friendly and to decarbonization, only to pull back when it affects their bottom line. Given this reality, I find it important to treat these types of investment themes with a healthy degree of skepticism.
The reason that I think Origin will be different is because its solutions do not require the customers to change their products or processes. As co-CEO Rich Riley explains on the Q2 earnings call, “Importantly, our solution is designed not to require companies to change their products or processes…There are near zero switching costs because we produce a material identical to what they currently use. The only difference is that our feedstock is derived from plants rather than petroleum.”
The fact that there are zero switching costs is the secret sauce here. If Pepsi (PEP) can incorporate Origin’s feedstocks and use them to replace their petroleum-based feedstocks without having to make an expensive capital outlay to retrofit its bottling machines, for example, that would have massive appeal to all parties involved. On the Drill Down podcast with Cory Johnson, Riley states, “When we meet with (potential customers) they are very excited to find that there is a drop-in material,” meaning that they “don’t have to change anything” in switching production to Origin’s materials.
“They don’t have to change anything – the product, the packaging, or the machine tooling,” Riley explained. “A lot of biomaterials companies show up and for the company, it is a big project and they have to change everything,” in terms of their manufacturing process.
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End Markets
As a pre-revenue company, investing in Origin is speculative in nature, but investment from some of the world’s largest CPG (consumer packaged goods) companies, like Pepsi, Nestle (NSRGF (OTC:NSRGF)), and Danone (DANOY (OTC:DANOY)) give Origin credibility and help to de-risk the investment. Clearly, these consumer packaged goods giants want to see Origin succeed.
Interestingly, it is not just plastic bottles and containers for beverages that Origin has its sights on disrupting (although this is already a huge total addressable market); the company also has a strategic partnership with PrimaLoft to develop carbon negative insulation for outdoor gear from prominent brands like Patagonia, Lululemon (LULU), Nike (NYSE:NKE), and Adidas (OTC:ADDYY). Regarding the partnership, Riley stated, “Many apparel companies are eager to decarbonize, but they don’t actually manufacture their own products. This is where our partnership with PrimaLoft can have a huge impact.”
Origin has also partnered with Ford (F) to explore using its materials in EVs, which it notes use three times as much plastic as traditional automobiles. Clearly, Origin management is being resourceful and reaching far and wide to expand into a number of potentially large new end markets. As Riley stated on the company’s Q2 earnings call, the “majority of plastics are used in textiles, cars and other household products. Just capturing a small portion of the incremental annual growth in plastics is more than enough to manage to build our business.” If Origin can take just some market share in each of these different end markets, investors should benefit greatly.
Valuation
It is difficult to value Origin using any traditional financial metrics, as this is a pre-revenue company. However, the sub-billion dollar market cap today could look very cheap given the size of the end markets that the company is targeting, if it can take just a small amount of market share in any of these markets. While the company does not have revenue to report, it often states that it currently has $3.5 billion in demand – signed documents, ranging from LOIs to “full take-or-pay contracts meant for project financing.”
Sentiment
Origin is rated as a ‘Hold’ by all three analysts covering the stock. However, the $9 average Origin Materials price target represents a 42.9% premium to current prices.
Risks
It is important to point out that as a pre-revenue company, and one that may not generate material revenues, let alone profits, for several years, Origin is a particularly risky investment. The company itself says it does not expect to generate revenue until 2023.
While Origin’s technology is impressive, it must be noted that it has not yet been commercialized on the massive scale that would be required for use by end users like Pepsi. As Origin itself warns in its S1, “While we have succeeded in producing small amounts of our products in the pilot plant for customer trials and testing purposes, we have not yet commenced large-scale production.”
The company is still in the process of building its first two major production facilities, known as Origin 1 and Origin 2. Origin 1 is scheduled to be completed by the end of 2022 and Origin 2 is scheduled for 2025. Any construction delays or cost overruns in the building of these facilities would obviously be materially negative for Origin, and these types of problems are common in the construction industry, so this is certainly a risk that needs to be monitored closely.
Takeaway
Origin Materials is an early-stage, pre-revenue growth company, and it will take several years to see if the company can execute on its strategy. Given the massive end markets it is targeting, and the desire of many of the world’s largest corporations to become more sustainable, if Origin can achieve widespread adoption, this could become a multibagger. If it cannot execute on its strategy or cannot commercialize its technology on a large scale, it will not be a good investment.
Overall, I feel that the low switching costs of incorporating Origin’s materials into supply chains is what make this company stand out from other sustainability plays. The investment from credible blue chip companies like Pepsi and Nestle and the massive tailwind of ESG forces solidifies my view that patient and risk tolerant investors with a multi-year time horizon will be rewarded for allocating a small position in their portfolios to Origin Materials.
Disclosure: At the time of publication, Michael Byrne had a position in Pepsi.
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