Oatly Group (OTLY), the Sweden-based company specializing in producing alternatives to dairy products, has a clear mission: to produce a food system that’s better for people and the planet. The company believes that shifting the food industry’s culture is essential to face humanity’s greatest concerns regarding climate, environment, health, and lifestyle.
With an increasing number of consumers shifting to a vegetarian/vegan eating lifestyle over the past decade, Oatly has been benefiting from a very fortunate market environment. Due to Oatly being the largest oat milk company in the world, I believe the company is well-positioned to keep capitalizing on the ongoing transformation of eating practices.
We can already see the effects of said trend in the company’s financials, which have been expanding rapidly. Oatly is focused on growing its production capabilities to meet the underlying demand, which is immediately absorbed once its products hit the market.
While all this sounds exciting, Oatly’s shares have been on a downward trend since the company’s IPO, currently trading around 73% lower from their past highs.
In my view, investors probably appreciate Oatly’s robust growth, but due to profitability likely remaining absent following the company’s expansionary plans, the stock is likely to remain at depressed levels in the short-to-medium term.
Still, since I am a believer in Oatly’s long-term prospects, I remain bullish on the stock.
Recent Developments
Oatly’s successful growth is well illustrated in its most recent quarterly results. In Q3, revenues came in at $171.1 million, an increase of 49% year-over-year. The company experienced continuously strong global consumer demand for its products while expanding the production and scalability of its operations.
Revenue growth was attributed to developments across all geographies and sales channels. Temporary headwinds due to COVID-19 and the temporary foodservice closures in Asia partially counterbalanced Oatly’s favorable momentum as the company scaled its global production capacity, particularly in Ogden, Utah.
Despite these headwinds, management remains assured investors in its ability to meet the rapidly growing global demand for Oatly’s products and remains optimistic.
Oatly expects to grow its annual total production capacity from 600 million liters of finished goods at the end of Fiscal Year 2021 to approximately 1.5 billion liters by 2023. Management forecasts this will require as much as $400 to $500 million in capital expenditures (CapEx) next year.
Is the Valuation Reasonable?
Oatly’s revenues are expected to grow about 61% next year, which is quite remarkable for a consumer staples company targeting a narrow target group. At its current levels, Oatly is trading at around 4.6 times its expected Fiscal Year 2022 revenues. While this multiple may imply a premium for the industry, I believe that Oatly’s ongoing growth levels could reasonably justify it.
That said, investors should be cautious of the fact that the stock could still underperform in the short term amid the lack of any profits. Investors should also not expect any dividend, at least in the next four-to-five years, in my view, as the company continues to expand.
Wall Street’s Take
Turning to Wall Street, Oatly Group has a Moderate Buy consensus rating, based on nine Buys, two Holds, and one Sell assigned in the past three months. At $14.36, the average Oatly Group price target implies 81.8% upside potential.
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Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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