Why a short seller thinks $ 11 billion oats are more overvalued than beyond meat

When it comes to food stocks on a tear, it’s hard to find two better examples than the Swedish oat milk darling Oatly and the vegetable protein leader Beyond Meat. Both have captured significant market shares in new emerging corners of the food market and have thus achieved skyrocketing valuations.

But when you look at the stock charts, the similarities abruptly end. Oatly shares have climbed 15% since they started trading in June. Beyond stocks have been a roller coaster ride since their IPO in 2019, but their value has more than doubled in value. The short-term interest in both reflects this: just 1% of stocks are short, while Beyond is the most short-circuited in the food business, reaching nearly a third of stocks short earlier in 2021 and s. ‘now standing at 16%.

And now that a short seller, Spruce Point Capital, has gone public against Oatly, investors are wondering if Oatly is on the verge of a crash. Beyond Meat and Oatly are both overvalued, says Ben Axler, founder and chief investment officer of Spruce Point, but Oatly, with 2020 revenue of $ 420 million and a market cap of $ 11.6 billion, is the one that currently works to the extreme. Beyond has 2020 revenue of $ 406 million and a market capitalization of $ 8.2 billion.

“We think Oatly is worse than Beyond Meat,” says Axler, focusing on a much lower gross margin than advertised and the high cost of gaining market share.

“We think the company has obscured its true gross margin,” says Axler, explaining how Oatly puts outbound shipping charges in its SG&A instead of its cost of goods sold, which is the food industry standard. “If you normalize and reclassify these expenses, when you look at the cost of goods sold, you find that Oatly has about the lowest gross margin of any public food company. This is integral to our criticism that Oatly is as poorly planned as any public food company we could find. “

The suggested readjustment cuts Oatly’s gross margins by around 7 percentage points in 2020: 23.7% from the 30.1% reported.

Axler is also highlighting a growing number of promotions and discounts it is offering to grocers, including free shipping, discounts on extra pints of ice cream, and discounts on newly launched yogurts for as low as $ 1.50 each. “The story of growth is a bit broken,” says Axler. “The competition is not going to sit still. If you’re Chobani, you’re trying to thwart Oatly’s expansion plans. This is what we are seeing happening.

Axler is a former Credit Suisse investment banker who started Spruce Point in 2009 amid the global financial crisis, and quickly managed to bypass companies like Build-A-Bear. He expects Oatly’s prices to rise over time, which will put even more pressure on profit margins.

Oatly’s response was muted. The company said it “is aware that a short seller is making false and misleading statements about the company. This short seller should benefit financially from a decline in Oatly’s stock price caused by these false reports.” Oatly rejects all of these false claims by the short seller and stands behind all financial activity and reporting. ”

Spruce Point has requested that an independent forensic accountant be engaged to prepare a public report. Following the Spruce Point investigation, at least five law firms announced that they had also opened investigations into Oatly, primarily for securities violations.

“We wanted to be one of the first to sell strongly and explain why,” Axler said. “Where do we go from here? Look, I think Oatly needs to show her bottom line, and there are clear signs that the results aren’t going to match her high-profit valuation.

By the numbers: Oatly vs Beyond Meat

2020 turnover: $ 420 million versus $ 406 million

Market capitalization: $ 11.6 billion versus $ 8.2 billion

Price / sales ratio: 28 times versus 20 times

Adjusted gross margin: 23.7% * against 28%

Percentage of shares short: 1% against 16%

MORE FORBESWild oats? Inside Spruce Point’s 124-page attack alleging mismanagement and misrepresentation at Oatly

This article originally appeared in Chloe Sorvino’s newsletter, Forbes Fresh Take, which deals with big ideas that are changing the future of food. Subscribe here.

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