Sweden-based Oatly Group (OTLY) specializes in producing alternatives to dairy products. The company has a very conscious and straightforward mission: to create a better food system for people and the planet.
Oatly’s belief lies in the principle that diverting the food industry’s culture is fundamental to facing humanity’s biggest concerns about climate, environment, health, and lifestyle.
Over the past decade, while impossible to accurately count, there has been a growing chunk of consumers pivoting to a vegetarian/vegan eating lifestyle. As a result, companies such as Oatly have been benefiting from a very convenient market environment.
With Oatly being the biggest oat milk producer across the globe, I believe the company is in an excellent position to keep capitalizing on the continuous shift in eating habits. This is already evident in Oatly’s financials, which have been advancing rapidly.
I remain bullish on the stock.
Oatly’s Focus
Oatly’s primary focus is expanding its production capacities to satisfy underlying demand, which is instantly absorbed once its products hit the supermarket shelves.
Does this sound exciting? It does, and it is. However, Oatly’s shares have undergone a downward trend since the Swedish firm’s IPO. Shares are currently trading 82% below their 52-week highs of ~$29. Why is that?
While every analyst and investor may have a different opinion, I believe that investors’ lack of faith in Oatly stock is due to the company’s profitability prospects remaining rather dubious.
Sure, the top-line growth is strong. However, as the company continues to execute its expansion plans, the bottom line is likely to remain depressed. Concerns regarding when Oatly will be profitable and whether by that time its profitably will be worthwhile are real and should be taken seriously.
That said, shares appear cheaply priced, assuming Oatly’s margins are even average. Hence, the bullish case for Oatly is not entirely ruined, even if the stock price chart indicates that this is the case.
Overall, while Oatly is a speculative investment to some extent, I am a believer in the company’s long-term prospects.
Recent Developments
Oatly’s successful top-line growth was again well exemplified in its latest quarterly results. In Q4, revenues came in at $185.9 million, an increase of 46.3% year-over-year.
This marks another quarterly record for Oatly. The company continues to experience robust global consumer demand for its products and its expanded production capabilities during the year helped with scaling its operations. Produced finished goods volume in Q4 reached 142 million liters versus 91 million liters in Q4 of Fiscal 2020, an increase of 56%.
Specifically, revenue growth was largely powered by further supply from Oatly’s new production capacity in Vlissingen, the Netherlands, and Ogden, Utah, which the market instantly sponged.
The 46.4% revenue growth becomes even more impressive when we take into account that sales were negatively affected by multiple factors, including softer than anticipated production output at the Ogden, Utah facility amid COVID-19 related factors, and softer than anticipated sales in Asia due to foodservice location closures, again, as a result of the COVID-19 variants.
Oatly expects its total expected run-rate capacity to nearly double by Fiscal 2023 year end to 900 liters. It then expects this metric to approach 1,300 liters by 2024 year end. As you may have already imagined, this implies that the company’s bottom line will remain rather compressed during this time.
In fact, in its earnings report’s commentary, management confirmed that it will continue to prioritize growth investments over profitability to gradually scale operations to best position the company to serve the underlying demand.
Management believes that this is the way through which the company can accomplish much better production economics and operating efficiencies in the long run.
Valuation
Oatly expects its Fiscal 2022 revenue to land between $880 million and $920 million, suggesting an increase between 37% and 43% compared to Fiscal 2021.
Following supply chain issues easing and the company further increasing its production capabilities, analysts forecast that revenues growth will re-accelerate close to 51% in 2023, implying Fiscal 2023 revenues of $1.35 billion.
Oatly’s medium-to-long-term targets also include generating gross profit margins greater than 40%, and adjusted EBITDA margins close to 20%.
Oatly is currently trading at around 11.1x its Fiscal 2023’s adjusted EBITDA. In my view, this is quite an attractive multiple, as the company is likely to retain top-line growth anywhere between 20% and 40% in the following years, even if we assume substantial deceleration post-2023.
Wall Street’s Take
Turning to Wall Street, Oatly Group has a Strong Buy consensus rating based on 10 Buys and two Holds assigned in the past three months. At $11.20, the average Oatly Group price target implies 120.47% upside potential.
Conclusion
Oatly is certainly a polarizing stock. While investors’ concerns over the company’s long-term success in generating sustainable profits are rather justified, Oatly keeps achieving its growth and production capability targets.
However, what appears rather certain is that the company is clearly experiencing outstanding demand, with sales directly growing in line with its production expansion. A strong brand is probably the greatest asset of a consumer staples company, and in that regard, Oatly clearly has an edge.
Despite the overall risks attached to Oatly’s investment case, I believe the positive attributes outnumber the negative. For this reason, I remain bullish on the stock.
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