The Ratings Game: Despite record quarterly revenue, Oatly says it fell short of its own expectations

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Oatly Group AB stock plunged nearly 21% on Monday after third-quarter revenue missed expectations and not just the Wall Street consensus but the company’s own forecast as well.

Revenue totaling $171.1 million was a record for the oat-based dairy alternative company, up from $114.7 million the year before, but Chief Executive Toni Petersson had higher goals.

“Now, most companies would be thrilled with this level of growth and execution in any operating environment, but we hold ourselves to a higher standard of execution based on our bottoms up view of our business,” he said on the call, according to a Factset transcript.

“And frankly, we expected to deliver approximately $178 million in revenue, representing a year-over-year growth of 55%.”

Like plant-based meat producer Beyond Meat Inc.
BYND,
+0.58%
,
Oatly
OTLY,
+10.58%

says it faced a few challenges during the quarter: lower-than-expected production in the Ogden, Utah, facility due to mechanical and automation problems; COVID-related supply chain issues; and problems that could lead to a loss of sales in the EMEA region.

See: McDonald’s was the only positive in a quarter full of negatives at Beyond Meat, analysts say

Still the company is optimistic, as it has “a strong, collaborative partner” in Starbucks
SBUX,
+0.89%
,
sees market share opportunity in Asia where lactose intolerance is a widespread issue, according to Petersson, and in Europe and the Americas where the company says concerns about health and climate change are shifting tastes towards plant-based foods.

But analysts are wary. BofA Securities downgraded Oatly to neutral from buy and slashed its price objective to $11 from $32.

“Our prior thesis on Oatly was predicated on the company’s ability to meet rapidly growing demand for alternative, plant-based oat milk globally, given an attractive TAM (total addressable market), a differentiated product profile and gross margin expansion,” analysts wrote.

“While we still believe in the viability of oat milk as a disruptor to both the dairy and plant-based milk categories, delays in ramping production and other operational complexities are likely to hinder the broader expansion of Oatly in the near to medium term. As such we believe the market will be less lenient toward a revenue-based story with negative EBITDA until consistent execution is achieved.”

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Truist maintained its buy stock rating but cut its price target to $15 from $25. Analysts say the company has grown so fast, it can’t forecast what’s next.

“Clearly, COVID has thrown an extra wrench in forecasting, but the recent volatility
reminds us of dozens of small cap companies, with similar revenue bases but smaller market caps, we have covered who ran afoul due to ‘growing pains,’” analysts wrote.

Truist thinks the 21% stock decline was “overdone.”

“We expect the stock to remain in a trading range until the next report but, in our opinion, it is too early in the company growth story, in the oat milk category growth story, and in the plant based beverage growth story to abandon ship.”

JPMorgan also remains upbeat, hanging on to it overweight stock rating, but cutting its price target to $15 from $21.

“From our perspective, there is little evidence that consumer demand has ebbed (unlike for peer Beyond Meat), and Oatly’s multiple is now extremely attractive as we see it,” JPMorgan said.

“But we are a bit worried that our peers won’t sufficiently lower their estimates for 2022; if they don’t, this stock may be stuck in the mud for a while.”

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Spruce Point Capital Management founder Ben Axler has bigger concerns about Oatly’s business.

“[W]e believe Oatly’s disclosure that it is ‘investigating quality issues that will probably result in destruction of inventory and lost sales’ aligns with conclusions we reached in our report that Oatly’s inventory growth outpacing sales was a sign of strain,” Axler told MarketWatch.

“Given a chronic pattern of manufacturing issues both in the U.S. and Europe and increasing financial losses, we express doubt on the viability of Oatly’s business model and expect the stock will continue to trade down.”

Oatly shares began trading in May, priced at $17. Shares rebounded on Tuesday, up 8.3% to $10.14.

The Renaissance IPO ETF
IPO,
+1.72%

is up 7% for the year to date while the benchmark S&P 500 index
SPX,
+0.68%

has gained 25.3% for the period.

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