Should I buy Oatly shares after the IPO?

Yesterday, Oatly (NASDAQ: OTLY) listed on the NASDAQ via an Initial Public Offering (IPO). It was a successful listing with Oatly’s share price closing at $20.20 – about 19% above the IPO price of $17.

Is Oatly a stock I should consider for my own portfolio? Let’s take a look at the investment case.

Oatly does what?

Oatly is a Swedish plant-based milk company. Founded in 1994, it’s the world’s original and largest oat milk business. Today, its products are sold in 60,000 shops and more than 32,000 coffee shops across 20 countries. 

At Oatly’s IPO price of $17 per share, the company had a valuation of around $10bn. However, after yesterday’s rise, the company is now valued at around $12bn.

Strong growth

There are several things to like about Oatly from an investment perspective. One is the company operates in a high-growth industry. Between now and 2027, the plant-based food market is forecast to grow at about 12% per year, driven by the growing vegan population and an increasing intolerance to animal protein. This industry growth should provide tailwinds for the company. It’s worth noting the company says its total addressable market (TAM) is $600bn.

Another thing that’s attractive about Oatly is its recent growth. According to its IPO prospectus, the company generated revenue of $421.4m in 2020, up 107% year-on-year. Revenue growth the year before was 73%. These figures suggest the company has momentum right now.

Risks

However, I do have some concerns about investing in Oatly stock. My first is the company isn’t yet profitable. Last year, it generated a loss of $60.4m, up from $35m the year before, on the back of investments in production, brand awareness, new markets, and product development.

The fact the company has been around for over 25 years and still isn’t making any money is a  concern, in my view. We’ve seen recently that the stocks of unprofitable companies can be crushed in a sell-off.

Secondly, I expect competition in this space to be intense in the years ahead. Already, there are a number of oat milk products on the market. Brands operating in this space include Alpro, Califia Farms, Innocent, Rude Health, and Quaker. Oatly tends to get good reviews but there are certainly other good products.

Consumer goods giants such as Unilever and Nestle could pose a threat too as they’re now moving into the plant-based food arena. Is Oatly’s brand powerful enough to protect its market share? I’m not so sure at this stage.

Finally, there’s the valuation. As mentioned, Oatly has a market-cap of about $12bn. This means its trailing price-to-sales (P/S) ratio is about 28. If sales were to double this year, its forward-looking P/S ratio would be about 14.

These valuations seem high, to my mind. It’s worth noting that Beyond Meat generated roughly the same level of sales as Oatly last year but has a market-cap of $6.8bn – about 40% lower. CNBC’s Jim Cramer described Oatly’s valuation as “ridiculous” yesterday.

Oatly stock: my move now

Weighing everything up, I won’t be investing in Oatly for now. I think the risks outweigh the potential rewards. In my view, there are better stocks I could buy.