NASDAQ-listed Oatly (NASDAQ:OTLY) has had a bad year by any standard. The share price is down a phenomenal 81%.
So what’s going on with Oatly? And does this collapse represent a good chance for me to buy?
What’s behind the falling share price?
To start, it should be noted that growth stocks have performed poorly over the past year and Oatly is relatively young Swedish food company that produces alternatives to dairy products made from oats. The Oprah Winfrey-backed firm is a loss-making company that has invested heavily in growth.
So, you may ask, how can you make a loss manufacturing and selling something as simple as oat milk? Well, expansion costs have been considerable and margins are thin.
At the end of 2021, Oatly had nine production facilities under construction through to 2023 and recently said it would invest in a fleet of five electric trucks to enhance its sustainable transportation operations. Capex costs are expected to come in around $1bn as the company looks to increase its global footprint and production capacity.
Meanwhile, in the first quarter, Oatly’s gross margin narrowed more than 20% to 9.5%, versus 29.9% in January-March 2021.
These negative indicators have been compounded by production issues and a loss of market share. Customers have also moved towards buying cheaper oat milk brands amid rampant inflation.
Prospects
I actually drink oat milk by the gallon, but I never buy Oatly. That’s partially due to taste and partially because they took small British producer Glebe Farm to court over its branding. Thankfully Glebe Farm, who’s product is far superior in my opinion, won.
But looking beyond my own issues with Oatly, I think the fundamentals here are pretty weak.
The group’s trailing 12-month gross profit margin of 19.49% is considerably lower than the industry average of 33.39%.Â
Operating losses per quarter have been accelerating too. The firm’s operating income fell to -$89m in the quarter ending December 31, and -$92m in the quarter ending March 31.
It’s also burning through cash during a period when borrowing is becoming increasing expensive. Operating cash flow over the past 12 months is -$253m.
The global dairy product market size was an estimated $481 billion in 2019 and is forecast to reach $586 million by 2027. That’s still 20% growth but with more and more companies entering the market. I’m not sure whether that will translate into more revenue for Oatly.
I also think there are signs that the vegan market isn’t growing as fast as investors expected, although I’m not sure whether that will necessarily apply to the oat milk market.
So, is now the time to buy Oatly shares? Honestly, I don’t think I’ll be buying Oatly shares at all. The margins are weak and the firm appears a long way away from being truly profitable.
Plus, I’m not sure about the long-term profitability of a high-end, international oat milk brand. I say that because of my own buying habits. Personally, I buy in bulk from Amazon, because oat milk doesn’t go out of date, and I choose the cheapest British product — normally Minor Figures or Glebe Farm. And I say British not because I’m a raving nationalist, but because oat milk is supposed to be the sustainable choice, and buying locally fits that narrative.