After a strong run immediately after the company’s Initial Public Offering (IPO) in May, Oatly (NASDAQ: OTLY) shares are now experiencing some turbulence. Yesterday, the stock was down about 7% at one stage and trading below $20.
Here, I’m going to look at what’s behind yesterday’s share price fall. I’ll also give my view on Oatly stock now.
Why did Oatly’s share price fall yesterday?
The reason for the Oatly stock dip was that Spruce Point Capital Management, a prominent short seller, released a scathing report on the stock. It said it’s “assembled significant evidence” that suggests the “walls are collapsing” on Oatly’s ambitions to dominate the oat milk market.
Some of the short seller’s concerns include:
Oatly’s market share. It believes the company is losing market share in the US and Sweden as a result of low barriers to entry in the industry and a lack of competitive advantage.
Profitability. It believes Oatly will “never achieve profitability” and that it will “sorely disappoint investors.”
Financial controls weakness. It believes Oatly has overstated its revenue and gross margin.
Operational issues. It believes Oatly is set to experience supply challenges created partly through poorly planned production facilities.
Boardroom issues. It claims both Oatly’s CFO and Audit Chair have obscured their roles in prior corporate accounting scandals.
The valuation. It points out that Oatly is trading at 17 times FY2021 forecast sales with a $12bn valuation (57% of the 2025 total projected non-dairy milk market). It believes the valuation is “unsustainable” and will end poorly for new investors.
Spruce Point sums up its research by saying it sees 30% to 70% intermediate downside risk to the stock.
My view on Oatly shares now
Short sellers don’t always get it right. Sometimes they’re way off the mark. I have to say however, I find this Spruce Point report quite interesting because it highlights a few risks I brought up when I covered Oatly shares after the IPO.
One of my main concerns was the low barriers to entry and competition from rivals, such as Alpro and Innocent. Another concern was profitability. I thought it was odd that the company had been operating for 25 years and was still unprofitable. I was also concerned about the company’s valuation. I noted this was much higher than that of Beyond Meat. So, I don’t think this report should be ignored. I believe it has some merit.
Of course, it’s worth looking at the other side of the story. Oatly does operate in a high-growth industry (it believes its total addressable market is nearly $600bn) – so there’s potential for strong growth. It also has a relatively strong brand and dominant positions in a number of markets. It could even be a takeover target in the future if consumer goods giants such as Unilever and PepsiCo move to increase their exposure to plant-based food products.
However, my view is that the risks outweigh the potential rewards here. After the report, I’ll be avoiding Oatly stock.
Edward Sheldon owns shares of Unilever. The Motley Fool UK owns shares of and has recommended Beyond Meat, Inc. 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.