Oatly (NASDAQ: OTLY) recently listed on the NASDAQ via an initial public offering (IPO) at $17 a share. The share price rose on the day and has since settled at around to $22. Here, I assess whether I see long-term opportunities in the dairy-alternative producer.
Bull case
One factor that fills me with optimism about Oatly shares is the expanding market. It is clear that many people have made the switch to oat milk products, seen in a recent Persistence Market Research study showing an expected CAGR (compound annual growth rate) of 7.4% for the oat milk market. This is seen in the rise in Oatly’s revenues – 106% between 2019 ($204m) and 2020 ($421m). This, in my opinion, places the future of Oatly shares in good stead, as a rapidly expanding market will naturally lead to a rise in demand.
On top of this, Oatly recently stated that its total addressable market is worth nearly $600bn. Even if Oatly manages to conquer a small percentage of this, we could see further growth in its revenues.
Oatly also recently struck a deal with Starbucks, introducing oat milk across all stores in the US. This will should provide consistent demand for Oatly products, leading potentially to a rise in Oatly shares.
Bear case
A major issue for me with Oatly as an investment is the fact that the company is unprofitable. In 2020 it recorded losses of $60m. I understand this may be due to expansion out of its founding country (Sweden), but this does not fill me with hope for Oatly shares and the future. It also does not allow me to gain a true representation of Oatly’s financial performance.
To add to this, as much as the expanding market does provide opportunities, it also comes with challenges. Competition in this sector is natural as many brands adapt to consumer taste. This is already seen through moves by Unilever and Nestle moving into the sector, as detailed by my fellow Fool, Royston Roche.
Oatly is not the only dairy-free producer currently available to consumers. In a market based on a rather new trend, what is to say Oatly will not disappear as quickly as it arrived? This could have a negative effect on Oatly shares.
What I’d do with Oatly shares now
I am aware of the risk associated with buying a stock so recently IPO’d, but with Oatly I do see real potential. The market it is in will continue to grow as people convert to the trend, and as such, I can only see this having a positive effect on Oatly shares.
Mounting environmental pressure continues to increase, and I predict people beginning with small changes such as switching to oat milk. The company has managed to convert many customers already in a small space of time, and this will only grow.
I see solid long-term potential in Oatly shares, currently trading at around $22, for my portfolio.