A company that recently went public, Oatly Group (NASDAQ: OTLY) is valued at a market cap of $7.81 billion. However, the stock is also trading 55% below its record highs, allowing investors to buy the dip. An oat milk company that provides a range of plant-based dairy products made from oats, Oatly is a Sweden-based entity.
The bull case for Oatly stock
According to market research reports, oat milk currently accounts for 14% of the plant-based milk market in the U.S. and has gained traction in recent years. Oatly has been a key driver of this trend on the back of its successful brand building and marketing campaigns. In order to increase market share in the retail space, Oatly first enters a new market via coffee outlets, allowing the company to improve brand awareness.
In 2020, Oatly more than doubled its sales to $421 million. Comparatively, the plant-based dairy market at the global level, is forecast at $18 billion in 2020 and is expected to grow by double digits in the upcoming decade, giving Oatly enough room to improve its top-line at a rapid clip.
Further, plant-based milk currently accounts for close to 10% of dairy milk sales and Oatly is well poised to take advantage of a rapidly expanding market.
In order to expand its business and penetrate other markets, Oatly is expected to spend between $750 million and $1 billion in capital expenditure allowing it to build capacity for its line of oat-based products.
The bear case for OTLY stock
Similar to most other high-growth stocks, Oatly continues to sacrifice profit margins for revenue growth. While sales rose from $204 million in 2019 to $421 million in 2020, its operating loss expanded from $30.75 million to $47 million in this period. The company’s core product is not cost intensive and its ingredients make oat milk cheaper compared to standard cow milk. But its gross margin is just around 30%. Last year, selling, general and administrative costs stood at $168 million or 40% of sales, resulting in a net loss of $60 million in 2020.
Given, Oatly’s weak gross margins, investors should expect the company to remain unprofitable in the next few years. Further its capital expenditure forecasts will also lead to negative cash flows in 2021 and beyond.
What next for Oatly investors?
Analysts tracking Oatly expect its sales to rise by over 50% to $695 million in 2021 and by 85% to $1.29 billion in 2022. Its loss per share is forecast to narrow from $0.35 in 2021 to $0.23 in 2022. We can see that OTLY stock is valued at a forward price to 2022 sales multiple of 11.23x which is steep. But Oatly’s enviable growth rates should allow the company to command a premium valuation.
The company ended Q2 with $847 million in cash which suggests it will have to raise additional capital in a few months given its ambitious expansion plans and high cash burn rates. An equity capital raise results in shareholder dilution which may also push the stock lower.
Oatly’s growth plans are compelling especially for a packaged foods company. But the plant-based diary segment will continue to heat up and attract competition as it is poised to expand at a healthy pace. In case the oat milk fad comes to an abrupt end, OTLY stock will lose significant momentum due to its sky-high valuation.
But Wall Street remains extremely bullish on Oatly and has a 12-month average price target of $27.46 which is over 100% higher compared to current trading prices.
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