Oatly stock price has done well in its first two days as a public company. The stock launched higher on its first trading day, pushing its total market capitalization to more than $13 billion. It ended the week at $22.46, which was a few points below its highest point at $23.
Oatly stock rises after its IPO
The alternative meal industry is doing relatively well globally as people shift to healthier meals. In the past few years, companies like Coca-Cola (KO) and Pepsi have increased their investments in healthier drinks. Similarly, companies like Beyond Meat have helped to popularize the alternative meats industry.
Another fast-growing industry is the plant-based milk sector. A recent study by the Good Food Institute (GFI) showed that the plant-based milk industry brought in more than $2.5 billion in sales in 2020, while plant-based meat rose to more than $1.4 billion.
Last week, Oatly became the first major plant-based milk company to launch its Initial Public Offering. Investors loved it, pushing the stock to a high of $23. This was significantly higher than the company’s target range of about $16.
There are several reasons why this price action happened. First, the company has focused mostly on the sustainability aspect. Indeed, a simple search of the word sustainability on its prospectus brings 162 results. This is an important aspect since ESG is the fastest-growing sector in the investing industry.
Second, Oatly stock price did well because of its association with Oprah, one of the most influential people in the world. In February this year, she was part of a $200 million investment into the company that was led by Blackstone and other investors. In general, investors believe that her association with the brand will lead to more sales.
Having a big backer can be beneficial to stock in the near term. However, in the long-term, the company needs to prove its worth. A good example is what happened to Weight Watchers. The stock soared to an all-time high of $106 after Oprah made an investment in 2015. However, since then, the stock has erased some of those gains.
Weight Watchers stock
Oatly stock price has also surged because of high demand due to its partnership with Starbucks. Indeed, there is an ongoing shortage of the company’s products.
Oatly challenges remain
While Oatly’s products are loved by its customers, the firm faces key challenges going forward. First, its success has attracted hundreds of competitors. This could lead to slow growth in the next few years. Indeed, while Beyond Meat was the initial market leader in the alternative meat sector, its market share has fallen because of rising competition from the likes of Impossible Foods and Hormel.
Second, the company will take time to become profitable. Its prospectus showed that its total revenue rose from $204 million in 2019 to more than $421 million in 2020. At the same time, its loss almost doubled from more than $35 million to $65 million. Therefore, since the company will need to spend millions in marketing and R&D, its path to profitability remains slim. Indeed, Beyond Meat’s losses have been increasing over the years. It had a net loss of more than $25.1 million in 2015 to more than $81 million in the past 12 months.
There are also concerns about its valuation. The company has a total market value of more than $13 billion in an industry whose global sales rose to $2.5 billion. Similarly, the firm has a price to sales ratio of 30, which is also a bit stretched.
Final thoughts
Oatly stock has done well as a public company. This is because investors love the company’s strong growth, rising popularity among customers, its partnership with Starbucks and Oprah, and its focus on sustainability. These factors will likely push the stock higher in the near term. However, as Beyond Meat did, there is a possibility that it will underperform in the long-term as investors focus on its valuation and losses.
