Oatly (NASDAQ:OTLY) stock has made a splash. The plant-based drinks company completed its initial public offering in May. Since then, shares immediately lifted from $20 to as high as $29 per share. Since then, however, Oatly has cooled back off, and given back most of its post-IPO pop.
Still, Oatly is trading at a valuation north of $10 billion. That’s pretty impressive for a relatively young company with an upstart line of products. The company seems ideal for the current times, with a perceived healthy and good-for-the-planet set of beverages.
A further look, however, finds, Oatly’s competitive advantage may not be as strong as the bulls perceive.
Oatly: Not Necessarily Healthier
Humans have debated what makes food healthy for ages. There’s no sign of the diet wars letting up anytime soon, either. For all we know about cutting edge areas of biology, such as cancer and rare diseases, optimal human nutrition remains a surprisingly tough nut to crack.
That said, a clear trend has emerged in recent years. It seems humanity overreacted to a few contentious studies in the middle of the 1900s blaming saturated fat and cholesterol for all manners of ill. A more comprehensive review of the data has found that the prevalence of heart disease in particular is not as cleanly tied to animal fats as previously thought. Rather, it seems, heart disease may be linked to inflammation, which in turn may be caused by excessive consumption of things such as sugar and grains.
Similarly, the rise of gluten-free, keto, and low-carbohydrate diets all point to a similar theme: Many humans struggle to remain healthy when eating a large quantity of carbs. Studies involving a diet higher in fat and protein and lower in carbohydrates have had success in reversing diabetes and other modern maladies.
This suggests that good old dairy milk, which is naturally a high protein food, might actually be more optimal for human health than all these processed food alternatives such as Oatly. Is mashing up a huge amount of oats to extract a small amount of oat flavoring and sugars and then adding rapeseed aka canola oil to it really better or preferable to a naturally occurring high-protein mineral-rich dairy milk that humans have enjoyed for centuries?
Oatly Is Probably a Niche Product
Some people prefer to drink plant-based liquid alternatives due to ethical concerns. If animal rights are an issue for someone, then by all means, that decision makes sense. Oatly could also be a good choice for people with lactose intolerance. Otherwise, the explosion of soy, almond, and now other even more obscure drink alternatives like Oatly seems like a solution in search of a problem. Cow milk is cheap, nutritious, and a staple of many diets and cultures around the world.
Previously, humanity has tried to replace animal products with “superior” machine-made alternatives such as swapping out butter for margarine and frying foods in trans fat laden factory-produced vegetable oils instead of tallow. The surge of cancer and other modern diseases that resulted forced policy-makers to walk back their recommendations on that front. I wouldn’t be at all surprised if plant-based fads such as Oatly quickly flame out as well.
Even if you buy all the vegetarian-based nutrition arguments around Oatly and health, OTLY stock is still a massive dud. That’s because it’s priced at an absurd valuation.
Oatly is currently going for around 29x sales. That’s an incredible number for a food company. Generally, food and beverage brands sell for around 5x sales or even less if they struggle with profitability. Oatly, not surprisingly, loses money.
Oatly bulls may argue that valuation doesn’t matter because of Beyond Meat (NASDAQ:BYND). That’s true to some extent. BYND stock is grossly overvalued using traditional financial metrics, and has remained that way for a long time. That said, Beyond Meat’s stock price hasn’t actually hit new highs since 2019, and appears to be losing traction both as a product and as an investment.
Meanwhile, other plant-based food companies such as Tattooed Chef (NASDAQ:TTCF) have seen uneven stock price performance since going public.
And, as far as products go, the potential market for burger and meat substitutes is arguably much larger than for plant-based beverages. Additionally, Beyond Meat was the first big vegan IPO. At this point, other companies seem like they’re chasing after money and attention that BYND stock largely soaked up already.
OTLY Stock Verdict
Here’s the bottom line on Oatly stock. The product doesn’t seem to be particularly healthy, nor is the stock’s valuation appetizing whatsoever. And in the off chance that the product does actually have staying power, some major packaged foods company will simply make their own version of oat drink and sell it to the masses with their far larger marketing budget and distribution channel.
If you buy OTLY stock, you’re competing against the likes of dominant multinationals such as Nestle (OTCMKTS:NSRGY) and Unilever (NYSE:UL) for that consumer dollar. That’s a tough fight. As such, there’s no reason to put Oatly in your shopping cart, either at the grocery store or your trading app.
On the date of publication, Ian Bezek held a long position in UL stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.