Should you invest in Oatly following its US$1.4b IPO?

YOU may have tried oat milk in your coffee. But does it belong in your portfolio?

Oatly Group AB, a vegan food and drink maker from Sweden, just raised more than US$1.4 billion in an initial public offering. American depositary shares of the company opened at US$22.12, 30 per cent above the IPO price of US$17.

The company has been on an upward trajectory over the past few years, as its oat-based, non-dairy milk percolated out of the hipster coffee-shop scene and into the mainstream American refrigerator.

The firm fits squarely alongside a slew of trendy companies, including Beyond Meat Inc and Impossible Foods, that all cater to consumers increasingly concerned about health and the environment.

But US$10 billion? That's the market value of Oatly, based on its listing. Some analysts wonder if its valuation is just too frothy.

Here's what you need to know about the company - as well as the case for and against investing:

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How is the company doing?

Oatly may have come on your radar recently, but it was started way back in 1994 by two brothers, Rickard and Bjorn Oste.

Rickard, a professor of food chemistry, developed an oat-based milk substitute with a team at Sweden's Lund University. Bjorn, who was an engineer by training, joined his older brother's venture in 1997. The firm soon developed a cult following.

Fans include Oprah Winfrey and Jay-Z, who have both invested in the company, along with Starbucks Corp founder Howard Schultz.

And yet like many hot startups, the company has a history of losses. Oatly reported a US$60 million net loss on US$421 million revenue in 2020, compared with a loss of US$36 million on revenue of US$204 million the previous year, according to its IPO filing.

What's the case for buying?

If you think oats are the future. Oat milk, which was essentially nonexistent in the United States before Oatly's entrance, saw a 151 per cent jump in sales in dollar terms at retail outlets during the 52-week period ended March 13, according to NielsenIQ.

SunOpta Inc, an organic food maker, jumped on news that Oatly was set to open above its IPO price, indicating that investors have an appetite for more environmentally friendly stocks.

If you believe in inflation. Dairy-based milk is still cheaper than alternative products. Inflation could change things: The price of milk and butter has remained largely flat, but as lockdowns end and consumer demand for dairy increases, costs could rise, making alternatives like Oatly more attractive.

If you like star power. Rapper Nas made news for his investment firm's stake in Coinbase. National Basketball Association player Kevin Durant made early investments in startups like Robinhood and Postmates. Elon Musk, one of the world's richest people, is widely credited with boosting (and bringing down) the value of cryptocurrencies such as Bitcoin and Dogecoin. The celebrities backing Oatly could boost its popularity, and also its share price.

If you see the end of lockdowns providing a boost. For now, Oatly's products have been confined to supermarkets for use at home. As people return to offices, new opportunities for the company's products - including at Starbucks, its big new customer - could provide a big boost to sales.

...and what are the reasons to steer clear?

If you have concerns about profitability. Oatly has had trouble staying in the black, spending to catch up with its more-established peers. And expenses are set to increase as the company hires additional workers, expands marketing and invests in research and development. The company says it might incur "significant losses" for the foreseeable future.

If you don't have much faith in the global supply chain. The company relies on a few producers for its oats, much of them imported from other countries. The pandemic showed that emergencies can cause serious disruptions to global trade. Even shorter-term events, such as the crisis in which a stuck ship halted traffic through the Suez Canal, could hurt Oatly's bottom line.

If you're wary of the competition. The company is entering a crowded market. Conventional milk producers like Groupe Lactalis and Fonterra may be able to provide their products at a lower cost than Oatly. And there's a host of non-dairy competitors, such as Blue Diamond Growers, which makes almond milk, or Califia Farms, which makes its own line of oat-derived products.

If you're not sold on oat milk. It isn't the most diversified company: oat milk accounted for 90 per cent of its revenue last year. If demand wanes as the pandemic ends and consumers leave their homes, Oatly could struggle to make up for the loss in sales. CEO Toni Petersson says the firm is eyeing vegan cheese as a new frontier for expansion. BLOOMBERG