One of the latest initial public offerings, Oatly (NASDAQ:OTLY) has so far avoided the curse that befell many IPOs before it. Though it’s not a guarantee that OTLY stock will continue moving northward, investors can take some encouragement from the auspicious start.
Mainly, the company and its underlying oat-based alternative to dairy beverages is extremely relevant.
First, sustainability is a major talking point in the business world today. As I mentioned in my coverage of Oatly’s IPO for Benzinga, multiple surveys reveal that “millennial and Generation Z consumers are willing to pay more for sustainable goods and services. Primarily, younger demographics pay attention to a product’s environmental footprint and social impact, putting the Oatly IPO on very viable ground.”
Specifically, a McKinsey & Company report indicated that young people will pay more for sustainable goods but only up to a certain point. It stated that, “For all but one category (packaging), less than 10% of consumers said they would choose green products if the premium rose to 25%.”
Admittedly, this is a challenge for OTLY stock. When you compare prices within the same retailer, a half-gallon box of Oatly Original Oatmilk costs $5, whereas a similar-sized container of 2% reduced fat milk costs $2. That 150% difference is far more than the 25% McKinsey cited as basically the point-of-no-return.
At the same time, when the nominal cost of the product is so low, it’s not entirely clear if millennials and Gen Z perform a percentage-variance analysis. Further, regarding consumable products, young people sparked a definitive cultural shift in their behaviors. Because they care about their dietary habits, it’s well within possibility that the under-40 crowd will pay for Oatly’s products.
Still, you might not want to jump fully onboard OTLY stock without checking what the opposition has to say.
A Better Price Might Greet OTLY Stock
If I had to summarize our own Larry Ramer’s take on OTLY stock, I’d describe it as cautiously optimistic. First, he brought up a Nielsen (NYSE:NLSN) report, which indicated that sales of oat milk hit $252 million, making it the fastest grower among plant-based milk types. Further, industry experts predict that sales will climb nearly 10% by 2023.
Second, Oatly has a healthy dosing of star backing. As Ramer explained:
Three of the early investors in Oatly are American TV star Oprah Winfrey, well-known rapper Jay-Z, and “A-list” actress Natalie Portman. All of those individuals are incentivized to use their star power to help Oatly sell a huge amount of its products.
Another investor in the company is former Starbucks (NASDAQ:SBUX) CEO and founder Howard Schultz. Since I’m confident that Schultz still retains considerable influence over Starbucks, I’m not at all surprised that the companies announced a partnership a couple of months ago.
Nevertheless, Ramer warned that, “Much more worrisome, however, is the valuation of OTLY stock. The shares are trading at 33 times the company’s sales for the 12 months that ended in March.” If there’s one thing that could derail Oatly, it’s the competition. While brand recognition and presence is important, it’s not exactly the only game in town.
To “deal” with one competitor, the $16.5 billion Swedish company is seeking to stop a British firm from marketing an oats-derived beverage called “PureOaty.” Oatly, which is in the process of building its first UK factory just a few miles from the PureOaty’s headquarters, is calling for the rival’s packaging to be altered. It says the brand’s packaging is too similar to its own.
Also, you must consider the economy. Although the headline numbers ring positively, the double-digit metrics in the personal saving rate — something that you rarely see in the modern era — poses concerns. If the recovery narrative from the novel coronavirus impact doesn’t cooperate with bullish expectations, that could result in a plenty of belt tightening.
In that case, I highly doubt that anyone’s going to pay a 150% premium on their milk products, even if they’re sustainable. That also leaves open the room for plant-based undercutters. FYI, PureOaty isn’t one of them. A quick price check shows a six-pack of their one-liter containers sells for 17.65 GBP ($24.84) versus 12.47 GBP for a six-pack of Oatly’s single liters. A similar order of milk from a cow would run you 10.80 GBP.
Worth a Modest Bet
Still, if the economy doesn’t fall off a cliff, you might want to give OTLY stock a chance. Primarily, carbon emissions is a serious problem — and farm animals emit a ton of methane gases into the atmosphere. Combined with plant-based proteins, companies like Oatly could make a real difference in the environment.
When you consider that parts of the U.S. face a water shortage emergency (due again to climate change), you quickly realize that sustainability is everyone’s job. Of course, that’s a broader catalyst that won’t just lift OTLY stock. However, Oatly does have the aforementioned brand power, which could give it an edge.
Still, you don’t want to mortgage your life going into OTLY. Put a little bit down now and wait for a possible discount later. In the long run, this might just work out profitably.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.