Street Starts Oatly (OTLY) With Mixed Views, Analysts Bullish on Business but Valuation Seen as High

June 14, 2021 7:01 AM EDT
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Price: $18.16 +0.67%

Rating Summary:
    7 Buy, 4 Hold, 0 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 21 | Down: 23 | New: 45
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Wall Street has initiated coverage of Oatly Group AB (NASDAQ: OTLY) with mixed ratings as some analysts see high valuation as a key driver behind them staying on the sidelines.

The Swedish company went public in May when it priced its initial public offering (IPO) at $17 per share to raise $1.4 billion. The IPO pricing valued the entire business at around $10 billion. Shares of the company have soared in the meantime to trade about 70% higher compared to the IPO price.

A few weeks post the IPO debut, analysts are seeing this rally in the market OTLY market price as a key hurdle to rating the stock as “Buy” or equivalent.

Analysts at Morgan Stanley, RBC, Oppenheimer, and BNP Paribas opted to stay on the sidelines, while Barclays, William Blair, Credit Suisse, Truist, Piper, Jefferies, Guggenheim are more positive on the stock.

Credit Suisse analyst Kaumil Gajrawala initiated coverage of OTLY with an “Outperform” rating and a $30 target price. The analyst is bullish on the business due to powerful branding, international exposure, and strong Environmental, Social, and Governance (ESG) score.

“Growing demand for health and wellness food/beverages, a mainstream Flexitarian diet, and a preference for sustainability-marketed consumer packaged goods (CPG) all act as category tailwinds. We estimate the near-term total addressable market (TAM) for major non-dairy options (milk, yogurt, and ice cream) was $20bn in 2020, growing to $28bn by 2025 (+7% CAGR). Shifting from a $500bn dairy market supports category expansion. Oatly’s 2% market share shows the company is in the early stages of growth. Long term, disrupting other dairy categories (cheese) expands the opportunity,” the analyst said in the report on OTLY.

Guggenheim analyst Laurent Grandet is also bullish on the Swedish company as he starts with a “Buy” rating and a $32.00 per share price target.

“We think Oatly is uniquely positioned with a defensible market position thanks to (a) its emphasis on sustainability, (b) a science-based and manufacturing competitive advantage, and (c) disruptive marketing with a unique “in-your-face” brand message to challenge the status quo. In our view, the company is in the early stages of a long-term growth story that could generate double-digit annual sales growth for at least the next 10 years if it continues to invest heavily in capacity expansion.

We see FY21 as a transition year with significant capex investments to double capacity, gross margin contraction from a less favorable manufacturing mix to help service volume demand, and higher SG&A expenses from becoming a public company,” Grandet wrote in a note sent to clients.

Unlike Grandet and Gajrawala, Oppenheimer’s Rupesh Parikh says valuation is a key reason why he remains on the sidelines with a “Perform” rating.

“We believe the company has some of the brightest growth prospects in our coverage universe, and look quite favorably upon its brand, product assortment, and positioning to the on-trend plant-based dairy category. We see a path for strong double-digit sales growth over the next few years (2020-2023E CAGR of 68%). However, following the 60%+ rally in shares since the IPO, we believe the upside case is now priced in. OTLY shares now trade at ~24x our FY21 sales forecast. The story remains on our radar, and we await either positive material revisions to our L-T forecasts or a pullback to become more constructive on the story,” Parikh noted in a memo.

Truist analyst Bill Chappell has a Street-high price target of $35.00 per share on OTLY.

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