Oatly has the benefit of a 'plant-based tailwind,' according to Jefferies analysts.
Truist Securities analysts initiated Oatly Group AB shares at buy with a $35 price target, calling the plant-based food company's strategy its "biggest asset" and the main reason to own the stock.
Oatly (OTLY) shares began trading on May 20 at $22.12, 30.1% higher than the IPO price of $17. The stock was trading at $26.52 on Monday afternoon, and has gained 11.4% for the month to date.
"With the recent completion of the $1.4 billion IPO, the company now has the fuel to accelerate the strategy which we believe will result in top-line growth well above our initial estimates for years to come," wrote Truist analysts led by Bill Chappell.
Launched more than 25 years ago, Oatly follows other plant-based dairy alternatives like soy milk, that was created in 1896 but only became commercially popular starting in the 1980s, and almond milk, Truist says. The company spent a decade fine-tuning its core Oatly oat-milk product.
Then the company built a brand that, from the outset, was focused on the environment, making "sustainability the core focus of its brand message," a message that, alongside healthy living, has big appeal to Gen Z customers.
"We believe this messaging is a key reason why Oatly and oat milk in general is re-energizing the overall plant-based beverage category which actually experienced decelerating growth from 2010-2015: drinking plant-based beverages isn't just good for you, it's good for the planet," Truist said.
Then Oatly introduced itself through coffee bars and cafes in North America and EMEA. "This strategy enabled oat milk consumption to surpass almond milk and soy milk consumption in 2018 in Germany and 2019 in the UK," Truist said, noting Oatly's exclusive partnership with Starbucks Corp.
Finally, the company is investing in marketing and manufacturing, with $225 million spent in the past five years.
"This production capability is vitally important to reduce out of stocks and maintain brand loyalty as other oat-based brands emerge," Truist said.
Jefferies analysts also take note of the $900 billion total addressable market $(TAM)$ that's acting as a "plant-based tailwind" for the company.
"Along with its brand purpose and product portfolio, Oatly has successfullypenetrated international markets using its proven multi-channel strategy, while plant-based dairy products are quickly becoming mainstream given the increasing appeal of values-driven plant-based food to the everyday consumer, providing an ongoing tailwind for the brand," Jefferies analysts wrote.
Jefferies rates Oatly stock a buy with a $34 price target.
Credit Suisse analysts say the near-term TAM for non-dairy items like milk and yogurt will be $28 billion by 2025, up from $20 billion in 2020.
"Oatly's 2% market share shows the company is in the early stages of growth," wrote analysts led by Kaumil Gajrawala.
"Long term, disrupting other dairy categories (cheese) expands the opportunity."
Oatly's current product lineup includes frozen dessert and "oatgurt," a yogurt alternative, and soft-serve. The company also recently announced a partnership with New York frozen yogurt chain 16 Handles.
Credit Suisse rates Oatly stock as outperform with a $30 price target.
The Renaissance IPO ETF $(IPO.UK)$ has slipped 0.6% for the year to date. The Invesco Dynamic Food & Beverage ETF $(PBJ)$ is up 20.1%. And the S&P 500 index has gained 20.8% for the period.