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Here’s what I’m doing about the Oatly share price

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Last week, Oatly (NASDAQ: OTLY) listed on the public stock market for the first time with an initial public offering that valued the company at $10bn. Shares in the oat milk company were initially priced at $17. However, strong investor demand has since pushed the Oatly share price up to $21.15 at the time of writing.

The positives

One reason investors have been keen to get their hands on Oatly shares is that the company stands to benefit hugely from the long-term trend towards plant-based milks. The production of oat milk requires 80% lower greenhouse gas emissions than regular cow milk. This makes it an attractive alternative to an increasingly environmentally conscious customer base. Evidence of this is the explosive growth in the consumption of oat milk in recent years. In the US, for example, the consumption of oat milk grew by 203% last year alone. As a result, oat milk is now the most popular alternative milk in nearly all of Oatly’s key markets including the UK, Germany, and Sweden.

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This secular trend has helped fuel Oatly’s rapid growth. Last year, the company grew revenues by 107%, far outpacing the 73% growth it was able to achieve the year before. Considering this growth came during a pandemic, these figures are very encouraging for the future.

Oatly also holds a dominant position in its industry. In its home market of Sweden, the company enjoys a 53% market share in the entire alternative milk market. It is also the largest seller of oat milk in the US, Germany, and the UK.

The success of the IPO and the subsequent increase in the Oatly share price is also partially due to the company’s strong brand. By running quirky and unique advertising campaigns, Oatly has successfully created a recognisable brand in a traditionally commoditised industry. This brand power should allow the company to build a competitive advantage helping it to hold onto its large market share. It should also help the company expand its margins. Currently, gross margins stand at just over 30%, which is impressive for such a fast-growing business.

The risks

Despite the strong potential for Oatly, there are some risks associated with the business. One such risk is the potential for competition in the alternative milk market. Large players such as Nestlé are already introducing their own products in this space seeking to compete directly with Oatly.

The biggest drawback for me, however, is that the business is very difficult to value. In order to know what any business is worth, one must have some idea of the cash flows that will be produced in the future. This is extremely difficult with Oatly considering it is still unprofitable and producing negative free cash flow. In fact, as the company has grown revenues, its losses have also risen. Last year, the business reported an operating loss of $47m compared to a $31m loss the year before. As valuing the business is so difficult, it is very hard to tell whether the current Oatly share price is attractive. For this reason, I will not be adding Oatly shares to my portfolio

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Ollie Henry has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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