On 27 July, Moonpig (LSE: MOON) released its results for fiscal year 2021. Despite more than doubling its revenues, investors reacted negatively. Since the results, the Moonpig share price has declined 23%. I think this could be a big opportunity to jump in. Here’s why.

The positives

First, I think Moonpig is an excellent business. It has a strong competitive advantage with two recognisable brands in the online greetings card market in the UK and the Netherlands. This has enabled the company to gain a dominant position in both markets with a 60% and 65% share, respectively. Moonpig also has an asset-light business model, only using around 4% of revenues for capital expenditure. This helps it to maintain an impressive gross margin of over 50%. It also helps the company achieve a very high return on capital employed, which hit 72% last year.

Secondly, Moonpig’s financial performance has been very strong. This year (FY21), the company managed to generate revenue of £368m. This is an increase of 113% from the previous year. Adjusted earnings-before-interest-taxation-depreciation-and-amortisation (EBITDA) also more than doubled during the year as well.

As restrictions are lifted and in-store purchases become possible once more, Moonpig’s revenues are expected to fall. Current estimates are for revenues to fall between 29% and 32% next year (FY22). While this is a big decline, it would still represent growth of between 45% and 50% over two years from FY20. After FY22, management expect steady growth in the mid-teens in the medium term. As margins are unlikely to change significantly, underlying earnings should also follow a similar pattern. This leaves me optimistic about the long-term financial performance of the company and, therefore, the Moonpig share price.

Valuation

If one-off expenses are excluded, Moonpig shares are currently trading at a trailing price-to-earnings (P/E) ratio of 21.1. This is high, but actually looks very low for a company that just doubled its revenues. However, as underlying earnings are forecast to decline substantially next year, a forward P/E ratio is more appropriate. I estimate that Moonpig has a one-year forward P/E ratio of 30. To me, this is attractive for a company expected to grow in the mid-teens in the medium term.

Risks

In my opinion, the primary risk associated with the Moonpig share price is the uncertainty regarding the future growth rate of the company. If management has underestimated the impact of the pandemic on the business, then it could be overestimating how well it will do in the future. Should the medium-term growth rate fall significantly, Moonpig shares will start to look overvalued.

Having said this, given that Moonpig has grown so quickly in the past and is a high-quality business, I am inclined to believe the forecasts issued by management. As a result, I have decided to add Moonpig shares to my portfolio.

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Ollie Henry owns shares in Moonpig.com. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

My style of investing involves choosing companies with strong competitive advantages. These are companies that are very difficult to compete with for one reason or another. Firms with strong competitive advantages are able to protect their profits, maintain a large share of the market and charge higher prices for their products. Here are two companies in the FTSE 100 index that meet this criteria.

FTSE 100 company #1: Diageo

Diageo (LSE: DGE) enjoys a strong competitive advantage through its portfolio of recognizable and popular alcoholic brands. These include Smirnov, Guinness and Johnnie Walker. Customers are loyal to these brands, allowing the company to charge higher prices. Thanks to this, Diageo has maintained an impressive average gross margin of 61% over the last five years.

Although the pandemic had a severe negative impact on the company, Diageo’s results for fiscal year 2021 released last week suggest that the company is recovering strongly. Last year, organic sales grew 16% year-on-year and adjusted earnings per share grew 7.4%. Management also expect this momentum to continue giving reason for investors to be optimistic about the future.

FTSE 100 company #2: Rightmove

Rightmove’s (LSE: RMV) competitive advantage comes from a phenomenon called the network effect. This is where the more people use a product the more valuable it becomes. In Rightmove’s case, the more people searching for properties, the more valuable the Rightmove platform is to estate agents. Equally, the more estate agents on the Rightmove platform, the more valuable it is to prospective customers. With nearly 20,000 advertisers and 1.7bn minutes of consumer traffic per month, Rightmove enjoys a very strong network effect. This makes it easier for the company to maintain its high market share of over 90%. It also allows the company to maintain very high margins. Over the last five years, the company has averaged an operating margin of 72%.

Similarly to Diageo, the pandemic impacted Rightmove significantly. Revenue declined 29% in 2020 largely thanks to a discount the company offered to advertisers. However, interim results released last week showed that Rightmove generated £149.9m in revenue during the first half of this year. This is 4% higher than the figure achieved in the first half of 2019 indicating that the company has fully recovered from the effects of the pandemic.

Am I buying these shares?

While both companies are very attractive due to their competitive advantages, I will not be adding them to my portfolio. This is because they are both too expensive for me.

At the time of writing, Diageo is trading at a trailing adjusted price-to-earnings (P/E) ratio of 30. For me, this is slightly too high for a company that analysts expect to grow earnings by 11% next year.

At the time of writing, Rightmove is trading at a trailing P/E ratio of 42. Again, for me, this is too high for a company forecasted to grow earnings 10% in 2022.

Both firms also seem expensive compared to the FTSE 100 index which is currently trading at a forward P/E ratio of 13.5.

Despite their lofty valuations, the fact that they both have very strong competitive advantages means that I am keeping a close eye on them for the future.

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Ollie Henry has no position in any shares mentioned. The Motley Fool UK has recommended Diageo and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

What are the details of the demerger?

GSK plans to split into two separate businesses. The first will be New GSK, which will focus on vaccines, general medicines and specialist drugs. The second will be the company’s Consumer Healthcare business, which produces personal health products and over-the-counter medicines. This split will be achieved by spinning off 80% of its 68% stake in the Consumer Healthcare business with a view to selling the last 20% shortly after.

Why is GSK doing this?

GSK has come under significant pressure from investors after several problems at the company. These include poor revenue growth and the struggle to produce a vaccine for Covid-19. The GSK share price has also not performed well. Currently, the shares are trading below their price five years ago. Management hopes the demerger will help solve these issues.

One key potential benefit of the demerger is that it gives the company a chance to rethink its capital allocation strategy. In 2022, GSK plans to cut its dividend from 80p to 55p. It also plans to shift a disproportionate amount of debt onto the new Consumer Healthcare company. These changes should save New GSK £1.75bn in dividend payments and £0.5bn in debt interest payments. As such, the company will have more funds available to invest in R&D, which should fuel future growth.

Am I interested in New GSK?

If the demerger is successful, there could be significant upside for investors. Management has issued a strong outlook for New GSK. Over the next five years, it’s expected to achieve revenue growth of 5% annually and operating profit growth of 10%. In 10 years, management is targeting revenue of £33bn. This would be a huge increase from the £24bn revenue the business generates now. If these targets are met, the GSK share price should do well.

While this outlook is appealing, there are significant risks. The success of pharmaceutical companies depends on their ability to produce new drugs that pass all stages of clinical trials. As my fellow fool, Zaven Boyrazian, pointed out, it only takes one drug to fail clinical trials for a company to experience a huge financial impact. This is not a risk I am willing to take.

What about the new Consumer Healthcare company?

This interests me more. It already sells a wide range of products with recognisable brands and has grown revenues strongly at a rate of 11% over the last five years. Being part of the consumer staples sector, it’s also likely to be more stable and predictable than New GSK.

One slight concern is the amount of debt this company is due to take on. Under the current plan, Consumer Healthcare’s net debt will be four times the company’s adjusted earnings-before-interest-taxes-depreciation-and-amortisation. This is high, but as long as no more debt is added, I’m not too worried.

Although I’m interested, GSK is yet to release all the plans for the Consumer Healthcare spin-off. Therefore, I will hold off from taking action until it does.

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Ollie Henry has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

On 7 July, Wise (LSE: WISE) went public through a direct listing. Wise shares initially opened at 800p but strong demand from investors has caused the share price to rise 22% to 974p at the time of writing. Will this trend continue and is this a good time to jump in?

Positives

One reason Wise has generated a positive reaction among investors is that the company is providing a great service to its customers. Wise facilitates cross-border currency transactions and its mission is to “build money without borders: instant, convenient, transparent and eventually free”. So far, it seems to be successfully working towards this goal. In the last financial year, Wise facilitated £54bn worth of transactions and helped its customers save £1bn. Some 38% of these transactions were also instantaneously processed and 83% were processed within a day.

Wise has also performed well financially over the last three years. Last year, the company grew revenues by 39% to £421m after having achieved revenue growth of 71% the previous year. Unusually for a new listing, it is also profitable. Last year, the company managed to generate a profit of £31m, more than double the profit it generated the prior year. This profitability has no doubt been a key reason why Wise shares have done so well since going public.

And it achieved this growth without taking on too much debt. Currently, the company’s total debt is worth £98m. This is a little over two times the company’s operating profit. To me this is a reasonable amount of debt for a profitable business growing as quickly as this one.

Risks

One of the main risks is competition. Currently, it has several competitors offering similar products. One such competitor is MoneyGram which facilitates transactions in 200 countries. This is 24 more countries than Wise. Furthermore, the company faces competition from the traditional banking sector. Wise is seeking to replace the ‘old’ and ‘outdated’ payments system that uses traditional banks. Personally, I can’t see banks simply letting Wise take away customers without doing anything. As such, I think it’s very possible that traditional banks will start to compete aggressively with the company in this space.

Wise is also operating a low-margin business. This is partly due to the competition in the industry and partly due to the company’s commitment to lowering fees. Last year, it achieved a net profit margin of 7.3%. This does not leave much room for a downturn in the market or increased competition in the future.

Another concern of mine is its valuation. Currently, it has a market capitalisation of £9.64bn. This puts Wise shares on a multiple of 311 times earnings. In order for such a multiple to be justified, it would have to grow revenues and earnings very quickly. Management has said it expects revenue growth to decline to around 20% in the medium term. Although this is very decent growth, I do not think it is enough to justify such a high valuation.

For these reasons I have decided not to add Wise shares to my portfolio. However, I will be keeping my eye on the share price just in case it falls to an attractive level.

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Ollie Henry has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Ocado (LSE: OCDO) shares are down 30% from their recent highs in January. Last Tuesday, Ocado released its interim results for the first half of 2021. Since then, the Ocado share price has fallen a further 8%. What caused this decline and will I be adding Ocado shares to my portfolio?

How did the company fare over the last six months?

Ocado revealed that it grew in the first half of the year. Revenues grew 21% year on year to £1.3bn. This growth came as the pandemic caused customers to eat out less and turn to online grocery retailers as an alternative to shopping in person. During the period, earnings before interest­, taxation,­ depreciation, and amortisation (EBITDA) also grew by 58% to £61m.

Ocado registered a loss of £20.6m for the period. This is largely thanks to the massive investments the company is currently making to expand its portfolio of state-of-the-art automated customer fulfilment centres. As these investments should lead to future growth, the firm’s losses do not worry me too much at this stage.

Ocado’s strong balance sheet also helps the situation. Currently, the company has a net cash position of £189m. As such, it should be able to withstand future losses and avoid financial distress.

Why has the Ocado share price fallen?

In my opinion, one of the main reasons for the recent decline in the share price is that investors are worried that Ocado cannot maintain its current rate of growth. As the economy starts to recover from the pandemic and lockdown measures are eased, more people have returned to restaurants and physical supermarket shops. As such, the demand for Ocado’s products is beginning to normalise. This was confirmed on Tuesday when the company reported that customer basket sizes are moving back towards pre-pandemic levels.

This concern is reflected in analysts’ forecasts. The median estimate among analysts is for revenues to grow by 16% in 2021. Although this is still strong growth, it is a sharp decline from the 33% growth the company achieved in 2020. I think this predicted decline in the growth rate, coupled with the fact that the Ocado share price had already increased by over 167% since the start of the pandemic, caused many investors to sell their shares in the company.

What’s in store for Ocado?

Despite the challenges the company faces with the reopening of the economy, I am optimistic about the future of Ocado. When the pandemic is over, the company is still likely to benefit from the general trend towards automation, digitisation, and e-commerce. This trend accelerated during the pandemic and I am confident it will continue after the pandemic has ended. Such a trend should give Ocado the opportunity to generate long-term sustainable growth.

Will I be buying Ocado shares?

As a general rule, I do not invest in unprofitable companies. This is because they are usually very difficult to value.

However, as I am positive regarding the future of this company, I will certainly be keeping my eye on the Ocado share price with a view to adding it to my portfolio.

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Ollie Henry has no position in any shares mentioned. The Motley Fool UK has recommended Ocado Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Back in February, I wrote an article explaining why I thought Dr Martens (LSE: DOCS) shares were a buy for my portfolio. Recently, the company released its earnings results for fiscal year 2021. Investors initially reacted negatively to the news sending the share price down 17%. In the last few days, the share price has risen 7% but remains 11% below its pre-earnings share price. What happened and why am I now jumping in?

The results

Despite the drop in the share price, the company performed well last year. During FY21, Dr Martens managed to sell 12.7m pairs of boots, up from 11.1m pairs the year before. It also grew revenues by 15% and expanded margins, with EBITDA (earnings before interest, tax, depreciation and amortisation) growing by 22%.

While retail sales fell 40% due to the effects of the pandemic, the company had huge success in its e-commerce business, which grew 73% year-on-year. At the end of the year, e-commerce contributed 30% of the company’s revenues.

Why did the shares fall?

In my opinion, Dr Martens shares tumbled because investors were disappointed by the guidance that was issued. Management reiterated the guidance given when the company first went public at the beginning of the year. Revenue growth should be a high-teens percentage next year and in the mid-teens over the medium term. This growth represents a steep decline from the 48% the company achieved in FY20 and is likely why many investors sold their shares following the news.

These disappointed investors may have a point. If the growth rate can fall that quickly, what’s to stop it falling further in the coming years? Despite these doubts, I still feel confident that the company can achieve its targets in the future.

Why did I buy Dr Martens shares?

As I wrote in my first article, I think Dr Martens is a great business. The company is growing revenues at a quick pace and it has a very strong brand that makes it difficult to compete with. I also think the company is likely to expand its margins as its direct-to-consumer (DTC) business becomes more important. Currently, DTC represents 40% of total revenues. Management is targeting this figure to reach 60% in the medium term.

The recent pullback in the share price also means that the shares are trading at an attractive valuation for me. At the time of writing, the share price stands at 439p. At this price, the company’s price-to-operating-income ratio stands at 39, which initially seems very high. However, when the exceptional costs of the IPO (initial public offering) are removed, this ratio falls to 23. As these costs will not occur again next year, I prefer to use the second figure. Using this ratio, the share price seems attractive considering the expected growth rate and quality of the business. For this reason, I decided to add Dr Martens shares to my portfolio.

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Ollie Henry owns shares in Dr Martens. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

What happened?

The effects of the pandemic are primarily responsible for the recent poor performance of Rolls-Royce shares. Global lockdowns have left air traffic at record lows. In turn, this has led to a steep decline in the demand for aircraft engines. This has hurt Rolls-Royce significantly as engines for commercial and business aircraft is its biggest source of revenue. Such a decline in demand was reflected in the poor performance of the company’s civil aerospace business segment, which generated just £5.1bn in 2020 compared to £8.1bn the year prior.

Overall, revenues in 2020 declined 29% year on year from £16.5bn to £11.8bn. This performance translated to the bottom line with Rolls-Royce recording a loss of £3.4bn and a massive free cash outflow of £4.2bn.

Light at the end of the tunnel?

There is some positive news, however. Last year, the company announced a restructuring of the company designed to save £1.3bn. This should help the company reduce its losses in the near term. It also raised £7.3bn by selling new shares and issuing more debt. By doing so, the company has boosted its liquidity position making the prospect of near-term financial distress much less likely.

There are also reasons to be optimistic about a recovery in the future. As the world becomes more vaccinated, the end of the pandemic is getting closer. When it does finally end, air traffic should recover to pre-pandemic levels, which should boost the demand for Rolls-Royce’s engines. In such a scenario, Rolls-Royce should recover strongly. Indeed, management are optimistic with their outlook. They estimate that the company will be free cash flow positive by the second half of this year and are targeting a positive free cash inflow of £750m in 2022.

Am I buying Rolls-Royce shares?

Despite these positive factors, I will not be adding Rolls-Royce shares to my portfolio. This is for a number of reasons.

Firstly, any recovery in the demand for aircraft engines may take years. Eurocontrol, an air traffic control body, predicts that air traffic will not recover to pre-pandemic levels until 2024 at the earliest. Such a slow recovery means that the demand for Rolls-Royce’s engines will likely remain at depressed levels for a while.

Secondly, the pandemic has left the company in a much worse position than it was before. In order to fund the huge cash burn, the company has had to issue a large amount of debt. Currently, the company has a net debt position (total debt less cash) of £3.6bn. This is huge for a company that is currently losing money.

Lastly, the company was already struggling before the pandemic. This is demonstrated by the fact that the company failed to turn a profit in three of the five years leading up to the pandemic. This does not give me confidence for the long-term future of the company. For these reasons, I am not looking to buy Rolls-Royce shares any time soon.

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Ollie Henry has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The positives

Lloyds shares are attracting investors for a number of reasons. Firstly, Lloyds is the UK’s largest retail and commercial financial services provider with over 25 million customers. As such, it is at the centre of the country’s economic recovery. As vaccines are rolled out and the economy emerges from the pandemic, confidence and economic activity should pick up. This should have a positive effect for the company, which should benefit from increased borrowing. The bank’s performance in Q1 2020 demonstrated early signs of this, achieving a £6bn growth in open book mortgage lending.

Secondly, the company operates a ‘low-risk’ business model. This means it focuses on its core businesses of retail and commercial banking, general insurance and long-term savings. These areas are less volatile than other financial services, such as investment banking. It also tries to make sure its loan portfolio is of the highest quality with 70% of its commercial banking loans being investment grade. This means the bank should be less exposed to the risk of widespread defaults than its competitors.

And the company has an impressive capital adequacy ratio, a metric that measures the ability of financial companies to absorb losses. One of the most popular capital adequacy ratios is CET1. In Q1, Lloyds’ CET1 ratio stood at 16.7%. This is well above the bank’s target of 13.5% and the required ratio of around 11% set by the bank’s regulators.

The negatives

So after all the positives I’ve just mentioned, why am I not buying Lloyds shares? The answer is because I tend to avoid bank shares altogether. This is for two reasons.

Banks are incredibly cyclical businesses. This means that their performances are heavily linked to the performance of wider economy. While it might be possible to know what the economy is going to do in the short term, forecasting long-term economic trends is far harder. Tougher still is forecasting the long-term trends regarding other important macroeconomic factors, such as interest rates. This is crucial in determining the long-term success of a bank such as Lloyds, yet it’s near impossible to do with any great accuracy (for me at least).

Secondly, banks are complicated businesses with relatively opaque balance sheets. In order to fully assess the financial position of a bank like Lloyds, I’d need to understand the quality and kind of loans it makes. The fact that over 70% of Lloyds’ commercial banking loans are investment grade is encouraging, but it’s no guarantee that these loans will be paid back (think back to the 2008 financial crisis). In the modern economy, there are also countless types of loan a bank can make, all with different implications. Due to these factors, I don’t feel confident I can fully assess Lloyds’ financial position and overall risk level. I prefer to stick with what I know. As such, I’m unwilling to invest in the company.

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Ollie Henry has no position in any shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I like to invest in high-quality businesses that will generate strong, predictable free cash flow growth now and in the future. Unfortunately, not every company fits this criteria, including — I think — the following three high-profile firms listed in the UK.

UK share #1: Argo Blockchain

Argo Blockchain (LSE: ARB) is a Bitcoin mining firm that has caught the attention of many investors in recent months. That makes sense given that last year, the company managed to grow revenues 120% and produce a profit for the first time thanks to the surge in the price of Bitcoin. As a result, investors have piled into the stock pushing the share price up 370% year to date.

But the problem I have with Argo Blockchain as an investment is that the company is so dependent on the price of Bitcoin. This is dangerous because Bitcoin is very volatile making it extremely difficult to predict what the price will do next. In turn, this makes it very difficult to forecast future earnings for Argo Blockchain, I feel.

UK share #2: Deliveroo

The next UK share I’m avoiding is online food delivery company, Deliveroo (LSE: ROO). This company certainly grabbed attention when its IPO flopped spectacularly with the share price falling 26% in one day. At the time of writing, Deliveroo shares are trading 35% below their initial listing price, leaving me wondering if this is a good time to invest.

But I think not. My issue with this stock is that the company is still unprofitable. Last year, Deliveroo recorded a loss of £226mn. Losses are slowly coming down. However, I think stiff competition from Uber and Just Eat, as well as questions over how the company treats its employees will make it difficult for it to turn losses into strong profits any time soon.  

Deliveroo did grow at an impressive 54% last year and has built a large user base with 7.1 million monthly active users currently on its platform. However, I still think the lack of profits makes Deliveroo shares too risky for my own portfolio.

UK share #3: BP

The last company I’m avoiding is oil company BP (LSE: BP). Since the start of the year, the share price is up over 20% following the steady increase in the price of oil. This trend, coupled with its large dividend yield (7.9% in 2020), has attracted many investors to the shares.

My personal problem with BP is similar to my issue with Argo Blockchain in that the company is heavily dependent on the unpredictable and volatile price of oil. This volatility has translated onto BP’s profit and loss statement which shows two losses in the past five years and no meaningful upwards trend in revenue. As such, it’s extremely difficult to predict with any degree of certainty what earnings the company will achieve in the future.

One positive sign for the BP is its planned transformation from being an international oil company to being an integrated energy company. This should make the business less reliant on the price of oil in the future. However, it will be years before this change has a significant impact on the bottom line. As such, I won’t be adding BP shares to my portfolio.

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Ollie Henry has no position in any shares mentioned. The Motley Fool UK has recommended Just Eat Takeaway.com N.V. and Uber Technologies. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Last week, Oatly (NASDAQ: OTLY) listed on the public stock market for the first time with an initial public offering that valued the company at $10bn. Shares in the oat milk company were initially priced at $17. However, strong investor demand has since pushed the Oatly share price up to $21.15 at the time of writing.

The positives

One reason investors have been keen to get their hands on Oatly shares is that the company stands to benefit hugely from the long-term trend towards plant-based milks. The production of oat milk requires 80% lower greenhouse gas emissions than regular cow milk. This makes it an attractive alternative to an increasingly environmentally conscious customer base. Evidence of this is the explosive growth in the consumption of oat milk in recent years. In the US, for example, the consumption of oat milk grew by 203% last year alone. As a result, oat milk is now the most popular alternative milk in nearly all of Oatly’s key markets including the UK, Germany, and Sweden.

This secular trend has helped fuel Oatly’s rapid growth. Last year, the company grew revenues by 107%, far outpacing the 73% growth it was able to achieve the year before. Considering this growth came during a pandemic, these figures are very encouraging for the future.

Oatly also holds a dominant position in its industry. In its home market of Sweden, the company enjoys a 53% market share in the entire alternative milk market. It is also the largest seller of oat milk in the US, Germany, and the UK.

The success of the IPO and the subsequent increase in the Oatly share price is also partially due to the company’s strong brand. By running quirky and unique advertising campaigns, Oatly has successfully created a recognisable brand in a traditionally commoditised industry. This brand power should allow the company to build a competitive advantage helping it to hold onto its large market share. It should also help the company expand its margins. Currently, gross margins stand at just over 30%, which is impressive for such a fast-growing business.

The risks

Despite the strong potential for Oatly, there are some risks associated with the business. One such risk is the potential for competition in the alternative milk market. Large players such as Nestlé are already introducing their own products in this space seeking to compete directly with Oatly.

The biggest drawback for me, however, is that the business is very difficult to value. In order to know what any business is worth, one must have some idea of the cash flows that will be produced in the future. This is extremely difficult with Oatly considering it is still unprofitable and producing negative free cash flow. In fact, as the company has grown revenues, its losses have also risen. Last year, the business reported an operating loss of $47m compared to a $31m loss the year before. As valuing the business is so difficult, it is very hard to tell whether the current Oatly share price is attractive. For this reason, I will not be adding Oatly shares to my portfolio

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Ollie Henry has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.