Does Recent IPO Oatly (OTLY) Deserve a Spot In Your Portfolio?

Plant-based milk alternatives are now available in different versions, with oat, almond, coconut, rice, and soy among the most popular. This market is expected to grow at a CAGR of 8.8% between 2021 and 2031, reaching a total value of $30.79b.

Last May, Oatly Group AB (OTLY) listed on the Nasdaq. Its shares dipped 34.4% since its IPO, underperforming its benchmark the First Trust Nasdaq Food & Beverage ETF (FTXG), which rose 13.04% in the corresponding period.

OTLY, formerly known as Havre Global AB, is based in Sweden and operates in more than 20 countries. It focused on developing expertise around oats: a global power crop with inherent properties suited for sustainability and human health. The company offers alternatives to milk, ice cream, yogurt, cooking creams, and spreads. 

OATLY’s is growing at a rapid pace, but the company is still losing money and trades at a high valuation

OTLY’s net sales have grown significantly over the past year and is estimated to continue on this path in the next few years. Wall Street analysts anticipate a rapid advance of OTLY’s top line this year, up 65.1% year-on-year to $695m. Going forward, sales are expected to nearly double in 2022 to $1.28b, before reaching $2.02b in 2023, representing a year-on-year surge of 57%.

The company’s net income is however less than stellar. The company has not yet posted a profit and is not expected to do so in the next two years. This year, OTLY’s bottom line is expected to be a net loss of $209m and revenues are expected to decelerate moderately in 2022.

Even though the stock has been sliding, OTLY is still expensive with a P/S ratio of 16.26x and a P/B of 6.16x.

The company has strong brand awareness, nevertheless, it lacks revenue diversification 

Over the years, OTLY’s has demonstrated that it was able to capture new consumers, with its unique marketing campaigns that boosted its brand awareness. First, the company targeted consumers that are focused on sustainability and by doing things differently it created word of mouth that maximized its advertising campaigns. With that, the company managed to create a competitive advantage, which grew their sales and which contributed to taking share from almond and other plant-based dairy varieties.

OTLY has now its eyes set on expanding in China, the world’s second-largest economy. Also, the company has recently signed a nationwide partnership with Starbucks, enabling it to distribute its oat milk product across 4,700 stores and 11,000 points of sales in the country.

On the other side, oat milk specialist is not the most diversified company, as oat milk represented 90% of its revenues last year. The company is looking to expand its portfolio of products, launching into oat-based ice cream, vegan-based cheese, and yogurts. Yet, demand for these products is still weak and it might take a few years before the company succeeds in changing customers’ consumption patterns.

Take away

Wall Street analysts are bullish on OTLY, with an average 12-month price target of $25.22 per share, representing an upside of 80%.  However, I have a different opinion.

Though OTLY has posted compelling top-line growth over the past few years and should continue to do so as it expands in the U.S and Chinese markets,   the company is expected to incur significant losses for the foreseeable future. In addition, the company’s valuation metrics are stretched, which does not bode well for investors looking to enter this equity growth story. Therefore, I don’t believe OTLY is currently a good investment.