Oatly Group (OTLY -0.73%) is a plant-based milk company, specifically focused on oats, that went public in May. Its stock price has already gained almost 20%, going from a first-day closing price of $22 to $26 as of Wednesday morning.
Investors appear moderately confident about Oatly's prospects, but it didn't rocket higher in its first day or week of trading -- unlike, for example, fellow plant-based food company Beyond Meat (BYND -2.70%), which more than doubled on its IPO day. But aside from its quirky advertising, there are several reasons that Oatly should interest investors.
More than oats
Oatly's oat-based empire booked sales of more than $420 million in 2020, a 106% year-over-year increase. That was also an acceleration from 2019's 72% growth.
Its oat-based products have taken off in several large markets. It has more than half of the dairy alternative market in its home base of Sweden, and in 2020, sales grew 199% in Germany and 99% in the U.K. The oat milk category is the fastest-growing dairy alternative in the U.S., and Oatly is the country's best-selling oat milk brand.
More than 60% of its sales came from Europe and the Middle East in 2020. Only 24% came from the North American market, where Oatly sees big opportunities. Foodservice sales accounted for 25%, and it has room for growth in that niche as well. It has a partnership with Starbucks, for example, which started using its products in its beverages in March.
The global dairy market took in $600 billion in 2020, and global milk sales are projected to increase at a compound annual rate of 6.6% through 2025. Multiple statistics indicate that we're in the midst of a worldwide movement toward greater use of plant-based alternative foods. For example, among people who consume plant-based milk, 60% to 70% began doing so within the past two years. Aside from opportunities in existing markets, Oatly envisions entering new markets with a $272 billion market opportunity.
Oatly believes it can take a big bite (or slurp?) out of that market. Among its competitive advantages are a solid management team, improved production capabilities, and a quirky marketing campaign.
So what's the catch?
The company said that production capacity shortages have been a "major constraint" on its ability to grow, but it has been opening new facilities to deal with that problem. Demand for its products has consistently outstripped supply. With sales already growing by triple-digit percentages, it will be interesting to see how these updates, including a facility opened this spring, impact sales.
Also, as is common among newly public companies, Oatly isn't profitable yet. Its net loss almost doubled from 2019 to 2020 as it focused on expansion at the expense of profitability.
Better than Beyond Meat?
Oatly's business is reminiscent of Beyond Meat's, since both offer plant-based alternative food products and promote their numerous benefits, such as being better for the environment. Beyond Meat was growing even faster than Oatly at its IPO, and its share price gained 250% within the first two months of trading. But the plant-based meat company has hit a challenging patch since then.
Mostly, its difficulties can be pinned on the pandemic. In 2019's fourth quarter, its sales growth was still 212%. That was chopped down to 141% in 2020's first quarter, when the COVID-19 crisis grew into a pandemic and sales in its foodservice segment dropped off. In 2021's first quarter, sales growth came in at 11% due to year-over-year declines in foodservice sales, though many restaurants had already reopened.
All that said, for investors, the case for a company should be less about its past performance and more about its future prospects. And that's where I think Oatly has an edge.
It's already a bigger company by sales, taking in $421 million in 2020 vs. Beyond Meat's $406 million. According to the Plant Based Foods Association, non-dairy milk was a $2.5 billion business in 2020, while plant-based meat was a $1.4 billion business. Meat alternatives grew faster than milk alternatives, 45% vs. 20%, but there are many other non-dairy product categories that Oatly can enter (or has entered) that are growing quickly, such as ice cream, cheese, and butter.
Oatly is a growing company with a lot of potential. Shares are fairly expensive at 32 times sales, but investors can expect high growth in the near future to justify that valuation. It might be one of the highest-growth food stocks, and investors may want to consider adding shares to their portfolios.