Red Flag Alert – Shell Game
Red Flag Alert – Shell Game
Will this consumer packaged goods story be another Oatly?
Creating and controlling a new market can be a great story...
And for a time, an even better stock.
But that very same stock can quickly turn into a flop... like Oatly OTLY 0.00%↑ .
After almost single-handedly creating the oat milk craze, Oatly’s 2021 IPO was so popular that it sucked in big names like Oprah, Howard Schultz and Jay-Z… all of them part of a Blackstone-led investment group that sank $200 million into the company. On its first day as a public company, Oatly became one of the year’s hottest IPOs, with a market value of around $10 billion.
And no wonder... In a single year its revenues more than doubled to $421 million.
While its losses also had nearly doubled, its timing couldn’t have been better as the plant-based food fad gained traction. As the company wrote in its prospectus…
We have built a new generation of plant-based milk consumers by converting traditional dairy milk drinkers to Oatly and by attracting new drinkers to the category altogether. The awareness and in-context trial achieved in the specialty coffee and tea channel was critical to educate the market about plant-based dairy and establish our leadership in the region.
A Story as Old as Time
Sounds good on paper. But like so many stories told so many times on so many hot products and brands, Oatly grew so quickly that it couldn’t keep up with demand, leaving an opening for competitors to fill the void.
Before long, it started losing shelf space, as competitors such as Planet Oat, Silk and Chobani rolled out their own oat milk lines...
As the below chart shows, sales plunged.
And as a result, its stock imploded, and now trades for less than $1 with a market value of barely over $500 million.
New Red Flag Alert
That’s the risk with highly popular consumer packaged products – and while Oatly might be an extreme case, it should be rumbling around in the back of the minds of investors who owns shares in this latest addition to my Red Flag Alerts.
I’ve been looking at Vital Farms VITL 0.00%↑ for months, and had planned to put it on my Red Flag Radar before its recent earnings… but got sidetracked.
Between here and there, it beat and raised guidance. But its stock skidded a bit more than 10% on comments from management regarding margins and after missing some analyst projections... and after mentioning a subtle but significant shift in strategy.
Shares are now around 33% below where they were the month before earnings. Even so, Vital remains maybe even riskier, which is why I’m adding it to the Red Flag Alerts.
Among the reasons, and key points covered in this report…