Shares of Oatly (OTLY) may be down more than 88% since its IPO in 2021, but one analyst expects the plant-based beverage giant to see a turnaround in 2023.
"From a company perspective, we think bearish sentiment has peaked, fundamentals have bottomed," said Mizuho Analyst John Baumgartner.
"In 2023, we expect supply chain acceleration, new distribution growth, acceleration in Asia from the improved COVID situation in China, as well as better commodity costs, and also an improving liquidity trajectory for the company into 2024," he told Yahoo Finance.
As such, Baumgartner recently upgraded Oatly shares to Buy from Neutral and more than doubled his price target, from $2.50 per share to $6 a share.
At the start of this year, Oatly announced a 10-year agreement with Ya YA Foods. With this, it plans to produce its proprietary oat base at Oatly's facilities in Ogden, Utah, and Fort Worth, Texas. The product will then be transferred to Canadian-based Ya YA Foods to be "co-packed into Oatly products on-site at each location," according to a company press release.
It's a big win in Baumgartner's opinion. "Ya YA coming in as a hybrid manufacturer now allows Oatly to split CapEx (capital expenditure) with a partner, so it really reduces CapEx going forward in 2023 and in the out years. We think you could have a CapEx savings of up to $100 million relative to the base case here in 2023. That significantly reduces cash burn, improves liquidity profile going forward," he said.
'More consumption opportunities' for Oatly, compared to plant-based meat
Baumgartner said COVID-19 prompted an increase in consumption of plant-based drinks.
The plant-based beverage category "has really had a pull forward of demand with the COVID lockdowns in 2020...up 45, 50%," he said.
According to the market research firm ReportLinker, the global plant-based beverage market is expected reach $48.8 billion by the year 2028, with an annual growth rate of 11.2%.
Baumgartner also noted that the category has "many more consumption opportunities" compared to that of plant-based meat.
"You can use it as a milk replacement in cereal. You can drink it as a beverage. You can use it as a coffee creamer. You can use it as an ingredient...you can see four or five consumption opportunities per day."
He said plant-based meats, such as those from Beyond Meat and others, have fewer "consumption opportunities." However, he favors the category over a "10 to 15 year period." Baumgartner has a Neutral rating on shares of Beyond Meat.
Quick-service restaurants also seem to have an easier time adopting plant-based beverages. "There's also a much larger service component in coffee shops, in Starbucks, supporting the category growth in beverages you haven't yet really tapped into on the plant based meat side," he said.
And while Wall Street is keeping a close eye on consumer trade-down amid higher prices, the plant-based beverage category doesn't seem to be impacted.
"Even with the category raising prices 12%, volume was only down 1%-2%, so in terms of elasticity, plant based beverage is really on par with cow's milk, soft drinks, bottled water. It really proved itself as a real staple category over the past year."
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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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