tiprankstipranks
Oatly Stock: Profitability Headwinds Make It a Speculative Investment
Stock Analysis & Ideas

Oatly Stock: Profitability Headwinds Make It a Speculative Investment

Story Highlights

Oatly’s market share in the industry is growing on the back of rising oat milk sales against its plant and non-plant-based alternatives. Revenues are on the rise, and as more facilities come online, the company’s production capabilities should improve. That said, the current trading environment has an adverse effect on profitability, throwing cold water on the stock’s investment case.

Oatly Group’s (OTLY) stock price remains depressed due to its shrinking profitability prospects due to the enduring supply-chain bottlenecks and inflationary pressures.

However, the company’s growth and expansion plans appear quite promising. Overall, Oatly’s investment case appears rather speculative at this point, which is why I am neutral on the stock.

Sweden-based Oatly Group specializes in bringing to market alternatives to dairy products. The company has a very conscious and direct mission: to develop a better food system for consumers and planet Earth.

Oatly’s philosophy lies in the principle that redirecting the food industry’s culture is critical to confronting humanity’s most prominent crises about climate, environment, health, and lifestyle.

This is important to mention since investing in Oatly goes hand-in-hand with believing that an actual shift in consumers’ eating habits will, to some extent at least, materialize.

Oatly’s Bet in the Food Industry is Bearing Fruit

Over the past several years, there has definitely been a shift in food culture. It’s quite impossible to accurately measure how many people have shifted from one diet or habit to another (e.g., toward a vegetarian lifestyle).

However, based on Oatly’s (and its competitors’) growing sales, we can definitely assume that alternative kinds of milk (in this case) have been gaining growing traction.

Specifically, oat milk, which is where the company specializes, has been gaining a growing market share in some of the most important markets in the world. In the United States, for example, oat milk now comprises 21% of the plant-based milk market, up from nearly 0% two years ago.

Germany and the United Kingdom are two other noteworthy examples, where oat milk’s market share has grown from around 30% and 20% to 64% and 47% over the past two years.

Therefore, Oatly has been operating in a very convenient market environment, with growing demand for its products. Hence, we can conclude that its overall bet in the food industry (in this case, a shift toward oat milk, either coming from plant or non-plant-based alternatives) has been successful.

The numbers never lie, after all. The company’s revenues have jumped from $155 million in 2019 to $345 million over the past four quarters, reflecting this underlying trend.

With Oatly being the largest oat-anything producer in the world, it is quite likely that the company stands in an ideal position to keep benefiting from the gradual transformation in eating habits.

Oatly’s Growth Persists, but Margins are Getting Squeezed

Oatly’s thriving top-line expansion was once again illustrated in its latest quarterly results. In Q1, revenues came in at $166.2 million, an increase of 18.6% year-over-year. For context, the 2018 – LTM Q1-2022 revenue CAGR now stands at roughly 71%.

While the latest quarter’s results may imply a slowdown compared to its two-year CAGR, Oatly’s revenues usually jump whenever a new facility comes online. No new facilities are expected to come online this year, but three are expected to do so in 2023. Thus, revenue growth is likely to spike once again next year.

The revenue increase was largely powered by further supply from the company’s existing facilities to meet the rising global demand for its products. In particular, produced finished goods volume in Q1 reached 121 million liters versus 90 million liters in Q1 of Fiscal 2021, an increase of 34.4%.

Oatly anticipates its total expected run-rate capacity to reach 1,300 liters by 2023 year-end, implying an over 100% increase from last year’s 600 liters. The company’s ongoing expansion, combined with supply-chain challenges and inflationary pressures, has had a major effect on its bottom-line prospects, nonetheless.

In fact, its gross margin declined from 29.9% to 9.5% year-over-year, with supply-chain challenges and inflation accounting for 9.7% and 7.6% of this drop, respectively.

Management believes that as Oatly’s production capabilities expand, it will achieve enhanced production economics and operating efficiencies. Indeed, despite being massively offset by other factors, gross margins actually enjoyed a 2.5% tailwind from a higher share of self-manufacturing.

Thus, there is a basis to support this case. Still, it’s ultimately speculative to assess when the current headwinds will ease, allowing for Oatly’s economies of scale to kick in and support improving margins. For all we know, Oatly could be losing money for several quarters, if not years ahead, if the current challenges persist.

Wall Street’s Take on OTLY Stock

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 $8.31, the average Oatly Group stock forecast implies 104.7% upside potential.

The Takeaway – A Rather Speculative Investment Case

Oatly’s market share in the industry is growing on the back of rising oat milk sales against its plant-based alternatives. This, combined with the company’s upcoming facilities that are set to boost its production capacities, should lead to retention of the current strong sales growth momentum.

With the stock trading at a forward P/S of around 2.7x and gross margins having the potential to hover close to 30% (as was the case in Q1 of last year), the stock appears rather cheap against its growth prospects.

Then again, it’s impossible to tell how long it will take until the present margin-compressing headwinds go away, which could lead to several money-losing quarters before the bottom line turns positive.

In the meantime, for the company to achieve its expansion goals, it may resort to external financing (debt/equity), deteriorating shareholder value. Thus, investors should be wary before allocating capital to Oatly at its current stage.

Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles