Why Oatly Might Not Be Overvalued
A quick and dirty valuation of the brand
Oatly debuted on the stock market last week at a $12 billion+ market cap. Much of the conversation has centered on the “frothy” (pun intended) valuation. With zero profits and a multi-billion valuation on the NASDAQ, the alternative milk manufacturer is certainly valued like a tech company.
Is Oatly Overvalued?
Oatly’s $12 billion valuations sit at 25x its revenues (Oatly’s 2020 revenues were $421 million). For comparison, typical revenue multiples are:
- 1.71 for food processing companies (which would suggest a $720 million valuation for Oatly)
- 3.70 for household products companies (which would suggest a $1.56 billion valuation)
- 4.32 for soft beverages companies (which would suggest a $1.8 billion valuation)
All of these ratios suggest Oatly is grossly overvalued. But, Oatly’s valuation is not based on what it is worth today, but on what it could be.
Why Oatly Might Be Worth the $12 Billion (or More)
Oatly has done something incredible — build a distinctive and memorable brand that stands for a growing category. People don’t ask for oat milk, they ask for Oatly.
Starbucks, which carries many dairy alternatives, did not decide to simply add “oat milk” to their menu the way they offer soy and almond milk. Instead, they announced that they now offer Oatly. What does this mean? Starbucks sees the Oatly brand as key to draw in sales — and Starbucks is a company that knows the value of a brand.
Let’s Run Some (Very Basic) Numbers
Oatly sits within the $179 billion milk category, which is expected to grow to $247 billion by 2025. Plant-based milk is expected to reach 11% of global milk by 2025. If we take Oatly’s current share of the plant-based milk market (2.3%) and apply it to projected 2025 plant-milk revenue (27.17 billion), Oatly would have 2025 revenues of ~$625 million.
$625 million is nice growth over current sales of $421 million. But it’s not tech growth.
However, this calculation assumes Oatly grows at the same rate as the category and focuses just on milk. Oatly grew 203% last year. If Oatly can double its share of plant-milks by 2025 (from 2.3% to 4.6%), it would achieve well over $1 billion in sales. But that's not all. Oatly is not going after milk, but dairy in general, which includes categories like butter, ice cream, heavy cream, and cheese.
According to Oatly’s IPO filings, the global dairy market is worth $789 billion annually. If all dairy categories follow a trend toward plant-based alternatives (and why not, given the high proportion of lactose intolerance globally — 68%) and become 11% plant-based by 2025, and if Oatly achieves a 4.6% share of these plant-based options within each dairy category (2x Oatly’s current share of plant-based milk, which is not out of the question given Oatly’s growth), Oatly would reach ~$4 billion in revenue in 2025.
Is a $12 billion valuation on $4 billion revenue reasonable?
Let’s assume Oatly starts generating some profits by then. According to annual reports, Pepsi’s net income as a percent of sales ranged 10–11% in 2019 and 2020. Nestle’s ranged between 12%-13%. If we apply this range of profits to Nestle and Pepsi’s P/E ratios, which are both just above 25, then Oatly could reasonably hit a valuation of $12.5 billion, or more (green shaded areas) on $4 billion in sales:
Now, this all depends on:
- Plant-based alternatives becoming a larger force in dairy categories outside of milk
- Oatly gaining share of the plant category across these other categories
Plant-based alternatives will likely continue to grow as more consumers adopt vegetarian or semi-veg habits, and others choose alternatives to deal with lactose intolerance.
Can Oatly win customers outside of milk?
It’s tough to say. Competition is zeroing in on these categories. KKR purchased Unilever’s margarine brands in 2017 with a plan to rebrand margarine products as “vegan butter.” Along with the repositioning, the KKR-owned business is launching new products such as plant-based cream and vegan chocolate spread.
However, what Oatly does have is distinctive design and growing distribution. Distribution (the shelf space within a store) makes or breaks consumer brands. Oatly’s 2015 redesign gave it the funky font that has become iconic in fridges.
These designs are also easy to spot in-store and on shelves, which will help Oatly cross-sell into cream and yogurt (er, Oatgurt).
Let’s Run Some (Very Basic) Numbers, Pt 2
If we assume Oatly has a P/E ratio of 27 in 2025 (just above Pepsi and Nestle’s 25, to account for faster growth), and a net income of 10% (conservative compared to Pepsi and Nestle, assuming Oatly will be still investing heavily), then we can estimate what share of plant-based dairy Oatly needs to get to achieve its $12 billion valuations (green shaded areas).
Oatly’s $12 billion valuations depend on Oatly reaching at least 6% of plant-based dairy sales, across all dairy categories. Given Oatly’s current share of 2.3% in plant-based milk, its top category, this will require some heavy lifting on the part of Oatly’s marketing team.
On the other hand, Oatly has proved to be a savvy marketer and has plans to expand internationally beyond its core US, UK, Germany, and Swedish markets, which will aid growth. And, as mentioned, Oatly’s packaging and already secured distribution can drive loyal Oatly milk customers to select Oatly’s other products.
Growth in plant-based alternatives across the dairy category will also aid Oatly’s growth plans. If plant-based becomes 11% (or more) of the dairy category, and if Oatly can become not just the oat milk company, but the oat dairy company, (and make oat the plant-based alternative) they could achieve valuations of $20 billion or more. If not, Oatly may stick around its current valuation.
Final Thoughts
Oatly’s growth past $12 billion will not be easy. Oatly faces competition, both within dairy as well as new entrants to oat milk, and new alternative kinds of milk on the horizon (pea milk, anyone?). In addition, the brand has been called out for manufacturing something little better than branded “sugar water” and calling it a healthy milk alternative. Nevertheless, Coca-Cola has done this for decades and profited handsomely off strong brand and distribution, a playbook which Oatly is already following.
In any case, Oatly’s $12 billion valuation does not feel like an overshot. It reflects strong growth projections, but also fits neatly into conservative assumptions given strong tailwinds in plant-based alternatives.
What do you think? Is Oatly the next Nestle? Or just another alternative milk fad?
