Oatly stock analysis: oat milk producer stirs up the stock market
Oatly is fighting the traditional dairy industry. The lawsuits that Oatly receives only strengthen the image. This was particularly evident in May when the Swedish company went public for over 10 billion US dollars.
Oatly offers oat milk and oat-based products, such as ice cream, yogurt, and whipped cream. Notable investors include former Starbucks CEO Howard Schultz, Oprah Winfrey, and Jay-Z.
This includes many enthusiastic customers – some of whom quickly turned into the opposite with calls for boycotts as soon as more direct or indirect connections to China or Trump supporters became known last year.
I see three reasons why the stock is currently exciting:
- Oatly offers a vegan, climate-friendly, and healthy (as they promise) product, which is in the same way as Beyond Meat, among others
- Oatly’s sales have roughly doubled recently, which is tremendously strong for a company that sells physical products
- The products are now in almost every supermarket, which means that the business model is also very tangible from the user’s point of view
So there are more than enough reasons to take a closer look at the stock and find out whether an investment could currently be worthwhile. You will learn how the business model works and how good it is, what the moat consists of, who the competitors are, and whether the Oatly share is now attractively valued after the share dropped significantly from its post-IPO high in June or not. Have fun!
Table of Contents
Table of Contents
Let’s first get an overview of the company and understand why Oatly is a Pure Climate Stock.
Basics of Oatly stock analysis
Oatly is a startup from Sweden, with Toni Petersson as the company’s CEO since 2012. Oatly products are found in almost every European and North American supermarket today. It produces vegan products in the beverage and food sector, notably the oat milk that lends its name. Their vision is to make the world a better place.
They have a bold vision for a more sustainable food system that benefits both people and the environment.
Oatly was founded in 1994, yet it is only now gaining traction. It costs money to make the world a better place: Oatly went public in the USA in May this year. The aim was a hefty $10 billion valuation, which was exceeded. Oatly’s revenue more than doubled to $421.4 million in 2020. The search for alternative vegan foods has fueled recent rapid growth in the long history of the industry.
The heart of Oatly is to use oat milk instead of regular milk. On this foundation, various products are available, including “oat drinks,” which are essentially a natural milk alternative in multiple forms.
Source: Oatly (2021)
Cooking variations based on whipped cream and creme fraiche are also available. Spreads have now also been added to the mix.
Why use oat milk in the first place? Oatly found some benefits in this and wrote:
“Oatly oat milk is a vegan, plant-based milk alternative made from gluten-free oats. It’s pretty simple, really. Our oat base is just oats and water. But it’s what we do with those oats and that water that makes Oatly so special.”
At Oatly, the company’s vision is inextricably related to its mission. I would even go so far as to suggest that it is a necessary component of the business model. Oatly explains why its products are superior in its S-1 filing:
“Traditional food production is one of the biggest drivers of environmental impact. Food production uses about half of all habitable land on earth, requires large amounts of resources, emits greenhouse gases, and harms biodiversity. At the same time, today’s food system — and often our eating habits — does not meet our nutritional needs, driving the prevalence of non-communicable diseases like malnutrition, obesity, and heart and vascular diseases. Through our products and actions as a company, we work to grow the plant-based movement and help people shift from traditional dairy to plant-based products and enact positive societal and industry change.”
In practical terms, this means that:
- Oat milk is vegan, avoiding the negative consequences for animals associated with traditional milk production
- Oat milk is perfect for those suffering from lactose intolerance
- Oat milk, particularly Oatly, should be healthier for the majority of people than standard cow’s milk (which is sometimes validated and sometimes questioned in my research, especially here.)
Size and valuation
Oatly has only been on the stock exchange for a few months. However, as is usual before an IPO, the valuations have risen sharply beforehand.
Why is Oatly a Pure Climate Stock?
Oatly according to my knowledge is the only company in the food & beverage industry that has started to transparently calculate and share with its customers the carbon footprint of its products. In the case of the Oatly barista drink, the result is printed onto the packaging itsef: it is 0.44 kg of CO2e per kg or product. The value includes all emissions in the value chain of the product from the farming of the oat to the distribution of the product to retail locations. But the applaudable transparency is not a sufficient reason why Oatly is a Pure Climate Stock. It is because the climate-damaging emissions of the Oatly drink are 70% less than those of traditional cow milk.
Share price development
Since going public in May, Oatly has had a rocky start, with the stock trading below its $17 IPO price throughout August.
Source: Bloomberg (2021);
Unless otherwise stated, all figures are USD and trailing twelve months (TTM). Addition ‘(e)’ = expected in the current year.
- Market Capitalization: $9.96 billion
- Revenue: $528 million
- Produced finished goods volume: 361 million liters
- Profit (Q1+Q2 2021): -$89 million
- Free cash flow: -$533million
- Country: Sweden
- P/S ratio: 19.45
- P/E ratio: –
- P/E ratio (e): –
- P/CF ratio: –
- PEG ratio: –
Growth & debt
- D/E ratio: 0.5%
- Gross margin: 28.73%
- Revenue growth (last 2 years): 82% p.a.
5 Facts about Oatly
- Oatly aspires to be the number one brand for alternative dairy products, just as Coca-Cola is to caffeinated beverages.
- Oatly’s products are sold in more than 65,000 retail stores and 60,000+ foodservice locations in more than 20 countries.
- A liter of Oatly product results in approximately 70% fewer greenhouse gas emissions and 79% less land use than dairy production.
- A growth increase of 53% in sales last year illustrates the growth fantasies for Oatly.
- Oatly ended Q2 2021 with no profit and a free cash flow of -$533 million.
Let’s look at Oatly’s business model and strategy in more detail:
How strong is the sales growth?
Sales have developed strongly:
- 2018: $ 118 million
- 2019: $ 204 million (+ 73%)
- 2020: $ 420 million (+ 107%)
- 2021 Q2: $146 million (+53% compared to the prior year’s same period)
Oatly’s sales are increasing, but the company has yet to make any money. Earnings and cash flow are both in the negative.
Sales are still focused on Europe:
- EMEA: 64%
- America: 24%
- Asia: 13%
The sales channels are divided into three categories by Oatly, with trade sales dominating:
The term “food retail” refers to the usual sale of products in supermarkets. Food service is based on sales to cafés that utilize it to make coffee, for example.
Oatly first enters new markets through food services (for example, preparing coffee using Oatly) before moving into retail. As a result, both divisions strategically complement each other.
What is the business model and strategy?
Oatly is the world’s first and largest oat beverage manufacturer and only specializes in oat products. The business model is straightforward: Oatly sources oats from farmers and uses proprietary technologies and 25 years of manufacturing experience to create one of the greatest products on the market.
Foodservice customers are likely to have monthly purchase agreements for the products. Supermarkets are also subject to quotas. So, while Oatly does not have a traditional subscription model, it does have a substantial number of repeat customers. However, there is no true lock-in; another similar product can theoretically replace Oatly at any time.
Food services sales increased from 2020 to Q2 2021, between 25% and 33%. In this category, some notable recent client wins include:
- Partnerships in Asia between Oatly and McDonald’s, KFC, Walmart, and 7-Eleven
- In the Americas, Oatly is available in all Starbucks stores and sold in 7-Eleven
- Tesco and Sainsbury’s now stock Oatly in Europe
Economies of scale emerge as production and sales volumes increase. It increases Oatly’s bargaining power in both sales and raw material procurement. However, because Oatly’s sales are still modest in this market, economies of scale will have to be built up even more.
How does Oatly want to grow in the coming years, according to the prospectus?
- Increased brand awareness and the expansion of plant-based foods should broaden the client base.
- Coverage and distribution in new and existing markets will be expanded.
- Production capacity will be increased, which has historically limited expansion as demand has exceeded supply, according to Oatly. New manufacturing plants include Fort Worth, USA (2023), and Peterborough, UK (2023).
- Oatly’s range of products is capable of expanding.
- As a corporation, they can continue to fulfill the promise to do what’s best for the environment, including sustainable supply chains and packaging, among other things.
The recipe for success for Oatly so far has been its branding and the extremely successful marketing campaign around it. Oatly’s greatest strength is its brand, which is related to its principles and vision. Following a few branding strategies, Oatly rose to fame and maintained its success.
The health benefits of oat milk include it being low in calories, cholesterol, and saturated fat, making it the perfect alternative to dairy milk. Oatly combines their oat milk with canola oil, giving it a smooth, creamy texture and making it a popular choice amongst baristas and coffee drinkers.
Compared to other milk substitutes, oat milk is a sustainable option. This is since not all plant-based milk is made in the same way. Almonds, for example, require six times the amount of water that oats do to grow, while soy requires a total of 21 times the amount.
When Oatly first entered the US market, it used a different distribution method than most other brands, opting for a direct-to-consumer approach. Small coffee chains and specialty coffee shops were persuaded to adopt the company’s products. Oatly successfully integrates itself into the “hipster” coffee culture by doing so. When customers witness baristas using Oatly, they subconsciously project the “hip” atmosphere associated with café culture onto the brand.
Lastly, Oatly is also noted for its elegant carton design and imaginative, graphic-filled packaging. Their creative designs use witty advertising and taglines, which are often self-deprecating and humorous. Here’s an example:
“It’s like milk, but made for humans.”
This brand side makes you feel like you’re with a friend who voices their opinion on controversial issues, portraying their honesty and authenticity. Oatly is portrayed as the friend you would hang out with.
Can Oatly prevail against the giants of the food industry?
Oatley’s success is dependent on its competition. The alternative dairy market is worth billions of dollars. At any point in time, a large conglomerate, such as Walmart, can decide it wants to be part of the same market. Due to their resources and financial backing, they could dominate the space, potentially slowing Oatly’s growth over the next decade.
Market size and competitors
The global dairy alternatives market was worth $20.5 billion in 2020, and it’s expected to rise at a compound annual growth rate (CAGR) of 12.5% from 2021 to 2028.
As a result, dairy alternatives are being used in an increasing rate of food and beverage products to appeal to the rising number of consumers who choose plant-based and other dairy alternatives.
So, what will the future market for Oatly look like?
Mid-term outlook: According to Credit Suisse analysts, the total addressable market (TAM) for non-dairy goods such as milk and yogurt would increase to $28 billion by 2025.
Long-term outlook: Oatly anticipates a large market, estimating it to be worth $600 billion. The market in question is the “dairy market,” which refers to the global consumption of dairy products (milk, cheese, butter, yogurt, etc.)
But analyst Jefferies does not believe that plant-based dairy replacements can completely serve the entire dairy industry, given the range of present product choices, production challenges, and functionality. Cheese, spreads, and various other dairy goods, such as cooking products, dips, etc., should, in their opinion, be more difficult to imitate in terms of taste, texture, and formulation.
In the global alternative milk category, oat milk is quickly increasing its market share with the oat milk industry double the size of soy milk. So if we compare Oatly’s current sales figures, we can say that they have tremendous market potential.
Oatly’s current 4% market share indicates that the company is still in its early phases of development and has many potentials ahead of it.
However, all companies that sell Oatly products can be theoretically considered competition.
Each day we see a new startup that attempts to follow similar concepts as Oatly. Consider supermarkets, drug stores, organic markets, and cafes all have an opportunity to thrive in the market should they choose to enter it. What about food giants, such as Nestle and Unilever, that fill our shelves and refrigerators. They all have the finances and resources to become a stiff competition to Oatly.
Major conglomerates, such as Walmart, Starbucks, and Rewe, sell directly to the end consumer, who can further their position by taking market share from Oatly. Then there are delivery services, such as Gorillas or Delivery Hero, that send directly to end consumers.
Oatly only has indirect consumer access by selling their products through intermediaries. What of the mentioned companies decides to replace Oatly’s product on its shelves with their own to increase their margins?
These risks are only increasing, and as Oatly becomes more popular, the more aggressive companies will be to push into the same market. So why would they want to miss out on a billion-dollar market when they have all resources readily available to them, such as sales structures, contacts, and networks.
Oatly’s growth margins prove they are masters of sales. But, can they compete against companies whose only business is sales and a direct-to-consumer business?
But, various factors set Oatly apart from its competitors. These include:
- Its mission is to develop plant-based food
- Offering an authentic and unique brand to consumers
- Expand their market share in the non-dairy industry
- Innovative products and patents are based on 25 years of experience
- Multi-channel sales that are impressing the foodservice industry
- Visionary leadership that focuses on people and the planet
What also speaks for Oatly is the following:
The market for alternative dairy product is not a market where one player takes it all as in the case of the technology industry with companies like Google or Facebook. In the beverage industry exist a number of brands that are dowing well along side the established players. Just consider the products Pepsi (US), Dr. Pepper (US), Fritz (Germany) and Thumbs up (India) that are available along side Coca-Cola. Thumbs up was even acquired by Coca-Cola because Coca-Cola could not enter the Indian market successfully with its own brand. So, even if one of the big food and beverage companies would push similar products strongly into the market, Oatly could still grow strongly given the large addressable market.
The Coca-Cola case is also an interesting one when viewed from another angle. Some say that Coca-Cola is the strongest brand in the world. Consumers will choose Coca-Cola over other Cola products, even though they taste the same. It is due to their brand awareness and recognition. Oatly is aspiring to have the same impact on the consumer. Just as Coca-Cola is the number one brand for caffeinated beverages, Oatly aspires to be the number one brand for dairy alternatives products. And although it seems easy to imitate a product which mainly consists of water, sugar, caffeine and colourants, Coca Cola has a secret recipe that makes its product taste unique. In my point of view (and according to many other consumers), Oatly products are very high-quality and the best in the market.
That begs the question – can Oatly become the Coca-Cola of alternative dairy products?
So, let’s explore a side by side comparison of the two:
Oatly shows very strong growth, but is not profitable yet. In fact, Coca-Cola’s business model has one distinguishing feature which makes the companies’ operating margin relativey high compared with other consumer goods companies. Coca-Cola only produces a concentrate which is shipped to bottlers, who bottle, package, and handle logistics. Coca-Cola’s added value is thus found in marketing, product development, and sales. Such high-profit margins do not appear to be feasible as long as Oatly manufactures its products in-house.
Drivers and outlook for oat milk-based products
Given that 70% of the world’s population lacks the enzyme lactase required to effectively break down lactose, the sugar present in dairy products, cow milk’s rise to become one of our staple foods has been remarkable. This, however, is about to change.
In a recent report the independent consulting company Boston Consulting Group analysed the trends in the alternative protein industry and sees an upcoming “protein transformation”. The authors say that the transformation is brought about by the following drivers:
- Public concern for climate
- Technology advancements leading to gains in production efficiency, improved taste and lower costs
- Policies leading to higher costs for climate-damaging emissions
Additional factors will contribute to the growth of alternative milk products, and particularly those based on oats:
- Health benefits: Oat milk reportedly helps boost immunity, lowers cholesterol, and is high in potassium, calcium, iron, fiber, and vitamin A and D. As lactose intolerance increases, the demand for oat milk increases.
- Shelf-life: A sealed container of oat milk can last up to 9 months, significantly longer than other non-dairy milk products making it easier to manufacture and store.
- Environmentally friendly: Almonds require six times more water than oats, and soy products have other damaging effects on the environment (for example contribution to deforestation in Brazil).
In summary, the positive driving forces for alternative proteins in general and oat-based products in particular should provide Oatly with continued momentum.
Let’s explore the strengths, weaknesses, opportunities, and threats of Oatly’s current business model.
Let’s start with the strengths. What sets Oatly apart at the moment?
- Exceptional high growth
- Sustainable and future-orientated business model
- Attract sustainable, like-minded investors with an ESG point of view
- Strong brand values that attract younger generations. In 2020, the “rule of 40” was exceeded, as the sum of sales growth (+ 107%) and free cash flow margin (-40%) is above the limit of 40. However, this is based on one year of data only and might change in 2021
Weaknesses are an inherent aspect of any organization. So let’s explore Oatly’s weaknesses:
- Oatly has sold its products through intermediaries limiting their access to consumers directly, and has shown little effort to develop a strategy for direct trading.
- One of the most common objections raised by investors is a weak moat based solely on the brand and brand values rather than a differentiated and unique product.
- Low gross margin is acceptable for a food company but falls short of other similarly rated businesses.
What are the opportunities for growth that will increase the company’s value?
- Oatly will see a continuation of the market’s current growth path as they add additional products, expand awareness, and regional distribution.
- There is an opportunity to expand their market share in Asia. Soy-based food already gets consumed around Asia, which is promising for Oatly. This could be due to Asia’s widespread lactose intolerance among the people.
Each company on the market is subject to some risk. These can include operational decisions, a flagging economy, or political interventions. So what threats could affect Oatly’s business model or growth?
The “good side” creates a height of fall
Many people support Oatly because they believe it is good for the planet. However, this attracts criticism more rapidly than other businesses.
Critics of the brand criticize a controversial investment deal that Oatly entered into in mid-July 2020: The Swedish group sold ten percent of its shares to the investment company Blackstone. This also holds shares in companies that are said to be largely responsible for the ongoing destruction of the Amazon rainforest. In addition, the CEO of Blackstone, Stephen Schwarzman, is said to be an avowed supporter and a close confidante of Donald Trump.
Oatly already came under fire in 2016 when the Chinese state-owned company China Resources took over a large part of the company. China is one of the largest emitters of CO2 in the world and is regularly criticized for violating human rights and freedom.
Here too, the author of an “Eco Magazine” Peppermynta writes at the end of 2020:
NOatly. No to Oatly! The Swedish manufacturer of vegan milk alternatives is said to have recently been in contact with loyal Trump supporters and also with questionable clearing in the Amazon rainforest. Why, for political and health reasons, we are keeping our hands off Oatly “oat milk” from now on and what alternatives to Oatly “oat milk” are available.
And bang – boycott. To my liking, that’s a pretty high bar to be set. But it shows how meticulously people look at Oatly.
After examining the company entirely, we need to evaluate its share, quality, and valuation to draw an effective conclusion.
The fair value of the share
The following assumptions are made over ten years to determine the fair value of the company:
Considering the calculations of the short term and sales growth approaching the long-term growth over ten years, we can conclude the following:
- Last sales growth: + 53 YoY
- Next 5-years assumptions: It is assumed that Oatly can maintain in the shor-term very high growth rates, with an average of 35% growth per annum over the 5 year period
- 6-10 years assumptions: The market has great potential and is expected to increase well above the market in 10 years, although it will get saturated. It is assumed that there will be a 20% growth per annum
These assumptions of company growth lead to a 11-fold increase in sales over ten years with a revenue of $0.5 billion today to $5.8 billion in the future.
Today, the gross margin is 28%. According to its Q2 results report, Oatly plans with an Adjusted EBITDA margin of 20%. Although at the moment net margins are negative. I assume that Oatly can turn this into a positive margin in the long term through growth investments. I estimate a long-term net margin of 7%, which is typical for the manufacturing industry.
Based on the previous assumptions I estimate a P/E ratio of 18 in the base case.
Is Oatly fairly valued?
In the bace case Oatly seems highly overvalued. Only in the very optimistic case, there is an attractive yield potential of 16.5% per year. For this scenario to take shape, sales would roughly need to increase by factor 25 based on the current level. This means a lot of things will need to go really well for Oatly in this decade for the investment in Oatly to yield solid returns.
- Future-orientated and sustainable business model
- They are based on the ESG point of view and operate out of Sweden, which offers diversification away from the typical markets
- Expect high growth with a lot of tailwinds
- A well-positioned, strong brand that appeals to younger, more affluent target groups
- The risk of competition is high in the future, as there is no recognizable moat
- Their valuation is extremely high considering that Oatly sells physical products with a 30% gross margin
I am personally a big fan of Oatly; particularly the barista alternative milk product. To my liking there is no better product in the market. I see the potential for Oatly to become the international brand for alternative dairy products, if the company continues to grow on a similar level. That is why I used the dip in August to buy some Oatly shares. But, being conscious of the expensive valuation I started off with a vey low volume. I give Oatly in my personal rating a score of 44 out of 100 points. Given that I am consuming the product daily, I will continue to follow the development of the company very closely and might decide to purchase more of this Pure Climate Stock in the future.
In this content I am presenting my personal opinion as an active private investor. This content is not intended to provide investment, financial, accounting, legal, tax or other professional advice and should not be relied upon or regarded as a substitute for such advice.