Stock Market

Oatly (NASDAQ:OTLY) zoomed from $17 per share to over $26 per share after its debut on the NASDAQ exchange. But can OTLY stock continue to climb? Say what you will about the company’s oat milk product, but its nutritional value is debatable. Yet there’s no question that this Sweden-based company is cashing in on the plant-based milk trend.

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With more consumers choosing its product due to dietary and environmental concerns, Oatly sales have soared in recent years. Its top line more than doubled between 2019 and 2020. Per analyst estimates, its revenue could see another big boost this year and the next.

However, this is more than reflected in its rich valuation. At today’s prices, it trades for about 33.5x this year’s estimated sales. For an ordinary stock, this could limit how much its price can rise. But as seen with other plant-based plays, like Beyond Meat (NASDAQ:BYND), stocks in this sector may be able to sustain frothy forward multiples. Continued growth at expected rates or meme stock phenomena can keep short sellers at bay.

So what’s the best way to play this recent IPO? Given current investment trends, it may not be worth it to short OTLY stock. But since buying now is a bet that Oatly becomes a plant-based meme stock, wait for lower prices before entering a position.

Why Investors are Excited About OTLY Stock

You can debate whether plant-based milk is good for you (or the planet) until the cows come home. But no matter what the truth is, the pivot to non-dairy milk isn’t slowing down. That’s clear from Oatly’s past results and projections between now and 2022.

In terms of sales growth, the company is “crushing it.” Between 2019 and 2020, sales zoomed from $204 million to $421.4 million. Its revenue growth will slow in 2021, but is still likely to be an impressive increase. Analyst estimates call for $630.5 million in sales this year, a nearly 50% increase from 2020. 2022 sales are projected to see a 43.4% increase to $904.4 million.

With off-the-charts levels of growth, it’s no wonder investors are willing to pay up for OTLY stock. As long as the company meets expectations for growth, it’ll be tough to bet against this “story stock.”

Even if growth starts to fall short of predictions, OTLY stock may not see a big sell-off as a result. If “meme stock madness” latches onto this name, Oatly could turn into the next Beyond Meat in terms of price movement.

How Its Frothy Valuation Could Hold Up

In normal times, OTLY stock would be a prime target for the short-selling community. Built around a fad and priced for perpetually high growth, investors would bet against Oatly near its highs and cover their positions after the stock experiences a correction.

But as you know full well, we are not yet back to “normal times” on Wall Street. And, no, I’m not talking about the “new normal” and “old normal” dynamics of the Covid-19 pandemic. I’m talking about the continuation of meme stock insanity.

AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME) may be dominating the headlines when it comes to this phenomenon. But Beyond Meat has also benefited from the short-squeeze trend.

Beyond Meat’s growth has been underwhelming in recent quarters. As a result, short-sellers circled the waters. Yet traders, such as those on Reddit’s r/WallStreetBets forum, are willing to go long with little concern for fundamentals or valuation. As a result, those shorting BYND stock were squeezed twice so far this year.

A similar situation could play out with OTLY stock. Meme stock traders could bid it up after the so-called “smart money” shorts it in response to weakening fundamentals. Or short-sellers, fearful of getting squeezed, could stay away altogether. That’s not to say this stock is bulletproof. But it may signal that you don’t want to bet against it, despite the hype and its possibly unsustainable valuation.

Outside of Meme Stock Potential, Wait for Lower Prices

If shorting OTLY stock is not worth the risk, does that make it a buy? It depends. As I said before, buying this today is basically a bet that Oatly becomes the next Beyond Meat.

Unless you’re banking on it becoming the next Reddit favorite, it’s best to wait for a more reasonable valuation before buying OTLY stock.

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On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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