Should I buy Oatly shares?

The newly NASDAQ-listed Oatly shares are on an upward trend. Will they continue to rise? Royston Roche makes a deep dive analysis of the stock.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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Oatly (NASDAQ: OTLY), the plant-based milk company, was listed last week; at Friday’s closing price, its shares are already up over 30% above the initial public offering price (IPO) of $17.

Should I consider buying Oatly for my portfolio? Here’s my take on the stock.

Company overview

Oatly is the world’s largest oat milk company in the world. It was founded by Swedish brothers Rickard and Björn Öste in the 1990s. The company’s products are very popular among vegans and non-dairy drinkers. Its main products include oat-based versions of milk, yogurt, cooking creams and ice cream. Last year, it raised $200m equity investment by a group led by Blackstone that includes celebrities Oprah Winfrey and Natalie Portman, rapper Jay Z and former Starbucks head Howard Schultz. Recently, it raised $1.4bn from its US initial public offering.

Why I’d consider buying Oatly shares

The company’s revenue growth is strong. In the first quarter of 2021, revenue grew by 66% year-on-year to $140.1m. For the full year 2020, revenue grew by 107% year-on-year to $421.4m. Oat milk consumption is growing in contrast to dairy milk consumption, which is slowing down. According to the Persistence Market Research, the oat milk market is expected to grow at a CAGR (Compound Annual Growth Rate) of 7% over the next 10 years. 

Health, nutrition and sustainability enthusiasts are its brand loyalists. The company has a 53% market share in its home market, Sweden, in alternative dairy products. The success in the home market helped the company to grow internationally in the UK, Germany and the US. 

Risks to consider

While I believe the management has done extremely well in the last few years to market oat milk globally. I feel that the company will face competition from new players as well as large companies like Nestle and Unilever. Nestle recently launched a new brand “Wunda” to market a milk alternative made from yellow peas. Unilever also announced its plans to focus on meat and dairy alternatives in the coming years. 

There is increasing use of oat milk and other dairy alternatives; however, it is still expensive when compared to dairy milk. Also, in most cafes, dairy alternatives are usually charged extra. So, price differentiation would be a concern in the long term for mass consumption.

The company has a good healthy product. However, in my opinion, for a company to perform well in the bourses it should be profitable as well. Unfortunately, Oatly reported a loss of $60.4m for 2020 and a loss of $32.4m for the first quarter of 2021. There were production restraints due to strong demand in the past. Additionally, the company had to increase the production facilities to meet the demand. This would further require huge capital investments, which in my opinion could further delay the profitability of the company.

In conclusion, I am not a buyer of Oatly shares at the current prices. Right now, I believe there are a lot of other good opportunities that I would consider buying.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Royston Roche has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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