Oatly (NASDAQ:OTLY) launched its initial public offering (IPO) with high expectations. The IPO went off at $17 per share and immediately traded higher. OTLY stock soon reached a high of $29 per share.
Now, however, shares have round-tripped, as the stock has fallen back to around its original IPO price. That’s been part of a broader sell-off in many speculative new companies. Additionally, alternative or “better for you” food companies have had a mixed 2021 at best. Firms such as Beyond Meat (NASDAQ:BYND), Vital Farms (NASDAQ:VITL), Tattooed Chef (NASDAQ:TTCF) and Very Good Food (OTCMKTS:VRYYF) have largely failed to meet investor expectations.
So Oatly’s tumble is not particularly surprising. Oatly was an extremely expensive stock in a sector — food start-ups — that has been on its back foot this year. However, for traders, this major correction could be setting up an opportunity to own the stock, at least in the short-run.
Why Traders Have Turned Negative on OTLY Stock
The easiest explanation for Oatly’s dramatic decline is from valuation. Even after its recent tumble, Oatly has a market capitalization of around $10.5 billion. That’s a huge number, given that its trailing 12 month revenues are a bit over $500 million.
It’s one thing to pay 20 times sales for a software company. It’s quite another to pay that figure for an unprofitable food company. Oatly has had huge top-line revenue growth. That gives investors a reason for optimism. Still, at 20 times sales, it requires a great deal of faith in both the product and the management team. This was even more true when the stock was going for 30 times sales prior to its recent stock price decline.
Another major issue for Oatly is that it isn’t the only oat drink player out there. SunOpta (NASDAQ:STKL), a multinational North American food company, has been aggressively expanding its oat drink business as well. There has been some chatter that Starbucks (NASDAQ:SBUX) may be diverting its oat milk purchases from Oatly to SunOpta. All this read poorly for Oatly, and its shares have tumbled.
As Price Changes, So Does Sentiment
When I covered Oatly in July, I had a very negative take. I’d urge you to review that article if you want a better sense of some of the fundamental problems with the company. That said, OTLY stock moved from around $21 to as low as $15 since publishing that article. And, after bottoming out at that point, Oatly is now showing the first signs of a comeback.
While it’s hard to love OTLY stock, there’s at least a more balanced risk/reward profile with shares well under $20. The company has grown sales more than 50% year-over-year, after all. If the company can reestablish a more positive narrative — or pure growth stocks come back into favor — shares could rebound. Bears have also sold more than 16% of the float short, which may potentially put Oatly in play for r/WallStreetBets traders.
OTLY Stock Verdict
If I had to bet, I’d put money on OTLY stock continuing to lose value in coming years. That said, short sellers have made the easy money in this name already. At this point, people betting further against Oatly may end up with indigestion, at least in the short-term. It made a ton of sense why short sellers were going after the company at $30, but under $20, the math changes.
Purely as a trading call, Oatly seems due for a bounce fairly soon. In fact, it seems like the turnaround has already started. Many heavily shorted stocks, including Oatly, have moved sharply higher off their lows in recent days. I wouldn’t want to invest in a long-term holding in Oatly at this valuation. That’s particularly true as there are some questions about the product’s ongoing consumer appeal as well. That said, Oatly has already corrected so much that the short-term signals now look bullish.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. 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.