Investors in Oatly (NASDAQ: OTLY) may have been spluttering over their corn flakes today, whether or not they were served with the company’s milk alternative. The Oatly share price crashed 20% in yesterday’s trading session on the NASDAQ exchange. They have now lost 54% of their value since their listing in May.
With such a fall, could now be the time to pick up some Oatly shares for my portfolio?
Why are Oatly shares falling?
The Oatly share price has been sliding since the company’s listing, but yesterday’s dramatic price action was in response to a particular piece of news.
Oatly released its third-quarter results and much of the news was good. But investors zoomed in on a couple of more worrying aspects. The gross profit margin fell from 31% in the same quarter last year to 26.2% this time around. Adjusted earnings before interest, tax, depreciation and amortisation remained in the red — and the loss was bigger than in the same quarter last year. Last year’s losses were $5m, but $27m this time around. The reported loss without exclusions was bigger, at $41m.
The company continued to trumpet its growth story. A lot of the bigger loss was placed at the door of the costs of expanding, from co-packing instead of manufacturing in-house, to higher staff costs as the company scales up.
Is this bad news or good?
Looking at the financial results, the trend is alarming. As the company seeks to grow, its financial performance is worse, not better, on some key metrics. I also think the signalling around performance was poor, which has reduced my confidence in the company’s management.
However, I actually think the results contained significant grounds for optimism. Oatly has done a great job of building demand for its product and indeed the category as a whole. That is why it has had to ramp up production so fast. It also is building a premium brand which should give it long-term pricing power. While margins are weak at the moment, over time that branding should help them improve.
I think there are two key questions for me to ask as a potential investor here. Is there going to be a huge oat drink market in future? Is Oatly going to be well-positioned to capitalise on that profitably? Based on how it is investing in growth opportunities and its marketing efforts, I think the answer to both questions is probably yes.
Is the Oatly share price a bargain?
Based on that, I reckon Oatly could be an attractive buy for my portfolio at current levels. It can do the hard work of building demand and brand recognition now. With a market capitalisation of under $6bn, it could then make a prime acquisition target for a larger company such as Unilever or Coca Cola down the line.
A lot could still go wrong. Continued high costs could mean sustained losses. Other brands may enter the market and eat into Oatly’s market share and revenues. Given the challenges, I don’t see the Oatly share price as a bargain. But I do think it’s more attractively priced than it was last week. I would at least now consider buying some Oatly shares for my portfolio.
Christopher Ruane has no position in any shares mentioned. The Motley Fool UK has recommended Unilever. 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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