I believe that Swedish oat milk maker Oatly (NASDAQ:OTLY) has the ingredients, both literally and figuratively, to become very successful over the longer term. Nonetheless, given the gigantic valuation of OTLY stock, I advise investors to wait for a major pullback in the name before buying the shares.

Among the strong, positive catalysts that Oatly has are soaring sales which indicate that it has strong products and backing by well-known, powerful celebrities. Also in Oatly’s  corner are category strength and an environmentally friendly story that’s likely to attract many young consumers.

Rapidly Increasing Sales and Celebrity Backing

In 2020, Oatly’s top line more than doubled year-over-year, reaching $421 million. The huge increase strongly suggests that the company is getting many repeat buyers and benefiting from very positive word-of-mouth referrals among consumers. And those developments, in turn, suggest that the company’s products (it makes oat milk and other products derived from liquid oats) are very appealing to consumers.

Three of the early investors in Oatly are American TV star Oprah Winfrey, well-known rapper Jay-Z, and “A-list” actress Natalie Portman. All of those individuals are incentivized to use their star power to help Oatly sell a huge amount of its products.

Another investor in the company  is former Starbucks (NASDAQ:SBUX) CEO and founder Howard Schultz. Since I’m confident that Schultz still retains considerable influence over Starbucks, I’m not at all surprised that the companies announced a partnership a couple of months ago.

I believe that this alliance is huge for Oatly and OTLY stock,  as the brand’s presence in Starbucks’ stores is undoubtedly greatly increasing Oatly’s exposure to the public.

Category Strength and a Good Green Story

Last year, sales of oat milk came in at $252 million, and it is the most rapidly increasing type of plant-based milk, Nielsen reported, according to Kerry. What’s more, research firm NPD Crest expects the latter category’s sales to climb nearly 10% 10% by the end of 20-23. So Oatly is effectively positioned in a strong subcategory within a rapidly growing category.

Since I’m allergic to cow’s milk, I often go to the plant-based milk section in grocery stores. In the last year, I’ve noticed that the shelf space devoted to oat milk has increased tremendously. I estimate that oat milk now gets about 50% of the shelf space of the plant-based milk sections, versus 30% for almond milk and 20% for soy milk. (For the record, I’m a soy milk fan).

Meanwhile, the company’s CEO, Toni Petersson, has stated that making oat milk generates “80% less greenhouse-gas emissions than traditional dairy-milk production does,” Seeking Alpha reported.  Also making oat milk appealing to environmentally conscious people is the fact that producing it requires much less water than making almond milk.

Profitability Concerns Are Overdone, but Valuation Worries Are Warranted

Some analysts have dismissed OTLY stock because of the company’s lack of profitability.  But with Oatly’s sales and gross profit both soaring (its gross profit nearly doubled to  almost $130 million last year), I think that profitability is a matter of when, not if, for the company. Although higher-than-expected commodity inflation could delay Oatly’s move into the black,  I nevertheless expect it to report a positive bottom line by 2023.

Much more worrisome, however, is the valuation of OTLY stock. The shares are trading at 33 times the company’s sales for the 12 months that ended in March. That’s a ridiculously high valuation for a food maker that could easily encounter tremendously stepped-up competition sooner rather than later.

The Bottom Line on OTLY Stock

The outlook of Oatly’s business is very positive, and the company looks poised to continue to grow rapidly and enter the black within a year or two. Yet its shares’ valuation is far too high.

Consequently, company-specific news and/or  a stock market correction is likely to pull down OTLY stock meaningfully within the next four to six months.  Therefore, I urge investors to wait for the shares to drop to the $15-$18 range before buying them.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.