Should You Milk Oatly’s IPO For All It’s Worth?

Should You Milk Oatly’s IPO For All It’s Worth?
Reda Farran, CFA

almost 3 years ago4 mins

What’s going on here?

Plant-based milk is more popular than ever before, accounting for 14% of total US retail milk sales in 2019 and likely more today. The fastest-growing subcategory, meanwhile, is oat milk: it saw American sales surge 300% last year.

One brand – Sweden’s Oatly – has been at the forefront of this massive oat milk trend. And with the company now looking to ride that wave all the way to the US stock market, I thought it’d be worth assessing the cases for and against investing in Oatly following its planned initial public offering (IPO) later this year.

What does this mean?

Oatly was founded in the 1990s by two Swedish brothers, whose research at Lund University led to the development of patented enzyme technology that turns oat starch into a substitute for dairy products like milk, yogurt, and even ice cream.

A $200 million investment round last year saw the firm secure financial backing from celebrities including Oprah, Jay-Z, and Natalie Portman, as well as alternative investment management giant Blackstone. Just seven months after achieving a $2 billion valuation, however, Oatly last week filed papers for an IPO that would allow it to raise money from public investors to fund the company’s growth – at a valuation as high as $10 billion.

Why should I care?

A fivefold valuation increase in under a year is mouth-watering for sure. But can Oatly maintain that sort of trajectory – and will it still be worth buying in after the company makes its (as yet undated) stock market debut? To help you make that decision, I’ve set out the main cases for and against investing below.

Reasons To Invest

Impressive growth

There’s a huge and growing demand for plant-based milks, fueled by environmental and nutritional factors. Market research suggests US sales of plant-based milks rose 23% last year, with oat-based product sales tripling. Oatly’s own revenue doubled in 2019 – and the company was reportedly aiming to double that again by 2021, turning profitable in the process.

Strong brand

Oatly is one of the most well-known and popular plant-based milk brands on the market. Customers love the company’s products because they combine dairy-like taste with strong sustainability credentials. Oatly’s core oat milk in particular mixes just like dairy milk, with its “barista blend” designed to steam and froth with coffee. That may be why Starbucks this week agreed to serve Oatly in all its US stores...

Successful precedent

Oatly is to plant-based dairy what Beyond Meat was to plant-based meat. The latter may therefore provide some guide to Oatly’s stock market debut. Beyond Meat priced its IPO at $25 a share in 2019 – and less than two years later, its stock price has risen almost 500% to around $150. While details differ, Beyond Meat’s success – and indeed the powerful short-term performance of many recent IPOs – may set a strong precedent.

Thematic stock

Oatly’s newly public stock would suit several sustainable investment themes currently being chased by billions of dollars. Switching from cow’s milk to oat milk can cut carbon emissions while also avoiding deforestation and high water usage (unlike almond milk, currently the US’s most popular plant-based substitute). A younger generation of conscious consumers are also embracing veganism on ethical grounds.

Comparing the environmental impact of different milks
Comparing the environmental impact of different milks

Reasons To Avoid

High valuation

Remember: Oatly’s IPO could value the company as high as $10 billion, while the firm was aiming for annual revenue of $400 million in 2021. That would give Oatly a valuation multiple of 25x sales – pretty expensive, and certainly more than 50% higher than Beyond Meat’s market value of around 16x sales. Everyday retail investors can only buy in after the stock’s debut, too, meaning they may buy in at an even higher valuation should it pop when trading opens.

Intensifying competition

Unsurprisingly, Oatly is up against numerous brands in the plant-based milk market. These include Alpro and Silk (both owned by French dairy giant Danone), oat-focused Chobani, Planet Oat, and Califia Farms, among many others. Even plant-based food company Impossible Foods is reportedly developing its own plant-based “impossible milk”. Aggressive pricing could hurt Oatly’s growth and profit.

Customer and regulatory backlash

Oatly faced criticism over its decision to accept funding from Blackstone, with some questioning the investor’s sustainability credentials. If the subsequent boycott gains traction, Oatly could lose customers to its many competitors. Forthcoming European legislation, meanwhile, aims to distinguish plant-based dairy product packaging – potentially putting people off switching.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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