For a pure-play investment in oat milk that's listed on a major stock exchange, one would be hard-pressed to find an alternative to Oatly (OTLY -3.12%). The closest thing to a real threat was PepsiCo's Quaker Oat Beverage, which the soda giant discontinued less than a year after its launch.
Besides, Oatly is considered a milkless-milk pioneer, having launched way back in the 1990s before vegan millennials effectively took over the healthy-comestibles landscape. Heck, the company even managed to get Oprah Winfrey on board as an investor.
Nearly a year after Oatly's initial public offering (IPO), however, one has to wonder whether Winfrey is second-guessing her investment. The share price has tumbled from $29 to $5 -- prompting questions about Oatly's growth prospects, yes, but also perhaps whetting the appetites of audacious contrarian investors.
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Contributing to the category
Assuming Oatly's research sources are accurate, PepsiCo might soon come to regret pulling its Quaker Oat Beverage. In the company's fourth-quarter 2021 earnings presentation, Oatly declared dominance over the oat-milk category across multiple world regions.
As of December 2021, among dairy alternatives, including soy and almond milk, oat milk evidently had 78% market dominance in Sweden, 48% dominance and a hefty lead in the U.K., and 65% dominance in Germany. In the U.S., meanwhile, oat milk only had 21% dominance compared to 63% for almond milk. However, soy milk (with a paltry 8% U.S. market dominance) and almond milk have been in a comparative state of decline since March 2019, while oat milk's market presence has been on the rise.
Moreover, while the ascendance of the oat-milk category undoubtedly benefits Oatly, the company also seems to benefit the category. From March 2019 to December 2021, Oatly single-handedly contributed 47% of the plant-based milk category's growth in the U.K., 34% of the category's growth in the U.S., and 22% in Germany.
Pricey oats, smaller moat
While Oatly appears to have a solid share of a promising niche market, Wall Street isn't necessarily sold on the company's future prospects. Indeed, Oatly stock broke below the psychologically significant $5 line (which some traders would consider the penny stock threshold) after the company released its Q4 2021 financial data.
Understandably, the company's press release touted Oatly's 46.3% year-over-year Q4 revenue growth and 52.6% full-year 2021 revenue growth. Message received: Those oat-milk cartons and bottles are flying off the shelves.
Particularly impressive was Oatly's Q4 94% revenue growth in Asia and 96.5% revenue growth in the Americas. Clearly, the oat-milk revolution is going global. Has all this revenue expansion translated to bottom-line results, though?
Unfortunately, it hasn't. From Q4 2020 to Q4 2021, Oatly's net loss widened from $37 million to $79.8 million. Moreover, from full-year 2020 to 2021, the company's net loss ballooned from $60.4 million to $212.4 million.
Additionally, Oatly's Q4 gross profit margin shrank to 15.9% versus 27.7% in the prior-year quarter. The primary reasons for this, according to Oatly, included cost increases "related to the start-up of the Company's three new facilities, including higher depreciation of $6.4 million, a charge related to start-up production and inventory at the Company's new Singapore facility of $2.3 million, and a higher share of co-packing production than planned."
Those might be short-term headwinds, but then there's the problem that's dogging practically every food producer. Thus, Oatly acknowledged "higher inflationary pressures" as another contributing factor to the company's contracting margins.
While broad-market inflation is indeed a problem, rising oat prices are particularly likely to weigh on Oatly's margins for a while. This issue came into play prior to the Russia-Ukraine crisis, as oat futures contracts nearly doubled in price from the summer of 2021 to March 2022.
Being the oat G.O.A.T. isn't enough
Oatly may deserve the title of niche category leader. Yet, for a while at least, the company's market dominance might not matter to investors.
It's going to be awfully difficult for Oatly to narrow its profitability gap when its core crop is so costly. As with many other consumer-goods businesses in 2022, Oatly's fate depends largely on the vicissitudes of commodity prices, and this correlation could persist for a while.
Hence, even while Oatly stock looks cheap, it could get even cheaper if oats become more expensive. So, this probably isn't the ideal time to try to milk profits out of Oatly stock.
