Shares in plant-based milk company Oatly (NASDAQ: OTLY) have taken a big hit recently. Last week, its share price was hovering around the $13 mark. Today, it’s near $10.
So why has Oatly’s share price plummeted? And has this weakness provided a buying opportunity for me?
Why Oatly’s share price has crashed
The main reason for the crash over the last week is that its third-quarter 2021 results were disappointing, posting revenue of $171m, well below analysts’ estimates of $185.5m.
Meanwhile, net loss attributable to shareholders was $41.2m compared to a net loss of $10.4m in the prior year period. Oatly blamed production issues at a Utah factory, restaurant closures in Asia due to new Covid-19 cases, and the truck driver shortage in the UK for the below-par performance.
What really spooked investors here was the guidance for the full year. Previously, Oatly had said it was expecting to generate revenue of $690m for 2021. However, it now expects revenue to “exceed $635m”. That’s a significant cut to guidance.
It’s worth noting that there were some positives in the Q3 results. One was the particularly upbeat tone from management. “Our confidence in the category opportunity and long-term trends and trajectory of our business have never been stronger,” said CEO Toni Petersson.
It’s also worth noting that the Q3 revenue was up 49% year-on-year, which shows the company is still growing at a healthy rate.
However, overall, the market didn’t like the results. On the back of the poor performance, analysts at Bank of America slashed their share price target from $32 to $11.
Should I buy OTLY shares now?
When I covered Oatly after its IPO in May, I said I was impressed with the company’s growth. However, there were several things that concerned me.
One was the valuation. At the time, the company had a market-cap of around $12bn and a price-to sales ratio of about 28. Those figures looked way too high to me. Another was the level of competition the company was facing. I was concerned that competitors could steal market share.
After the recent share price fall, the valuation here now looks far more reasonable. Today, the company has a market-cap of around $6bn and a price-to-sales ratio of 9.4, falling to 4.7 if we plug in next year’s consensus revenue forecast of $1.3bn.
However, I still have some concerns about the level of competition here. There are now a ton of brands operating in the oat-milk space, including the likes of Califia Farms, Innocent, and Chobani. This isn’t ideal from an investment point of view. Oatly may have to lower its prices to maintain market share.
Another concern for me right now is the level of short interest here. At present, around 16.5m Oatly shares are on loan. That represents about 25% of the free float. This tells me that many institutions expect to see the share price fall further.
Given the high level of short interest, I’m going to keep Oatly shares on my watchlist, for now. All things considered, I think there are better growth stocks to buy.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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