Shares of Oatly (OTLY), the maker of plant-based versions of dairy products, sank on Wednesday following a critical report from an activist short-seller raising concerns about the accuracy of the company’s financial statements and the robustness of its Environmental, Social, and Governance (ESG) practices.
In a new 124-page report, activist short-seller Ben Axler, the CIO and founder of Spruce Point Capital, argues that Oatly faces “30%-70% intermediate downside risk as it fails to achieve lofty targets baked into its valuation” and a longer-term insolvency risk “when investors realize that the oat-milk food fad has matured and interest in funding money losing businesses wanes.”
Spruce Point Capital's report also raises concerns that investors “are not focused on multiple accounting and financial control weakness which we believe have manifested in revenue and gross margin overstatement of 640bps.”
“Our concerns are documented by former employee interviews and glaring signs of projected CapEx inflation running 77% higher than historical costs after Oatly has churned through three auditors in six years. Investors should also be concerned that its CFO and Audit Chair both obscure their roles at prior corporate accounting scandals. Oatly’s valuation has mysteriously ballooned nearly 6x since a $200m investment by Blackstone in July 2020 despite our evidence pointing to market share loss. Oatly is trading at 17x ‘21E sales and 75x adjusted gross profit and a $12bn valuation (57% of the 2025 total projected non-dairy milk market),” Axler wrote.
It’s Axler’s view that the company’s valuation is “unsustainable and will end poorly for new investors.” The short-seller also called on the board to hire an independent forensic accountant to look into his claims outlined in the report.
According to the report, Axler also takes issue with the company’s commitment to ESG practices, arguing that "Oatly doesn’t practice what it preaches in terms of good Environmental, Social, and Governance practices." Axler referred to a June 2021 investor presentation that he believes the company “cherry-picked” the results from a study “by failing to show that its impact on water consumption is worse than dairy milk.”
“Through a FOIA [Freedom of Information Act] request, we learned that Oatly’s production process also generates dangerous volumes of wastewater that requires it to build its own treatment facilities and the Company is out of compliance with EPA regulations in New Jersey. Oatly’s first study discusses the importance of transportation costs, accounting for nearly 1/3rd of its environmental impact. Yet, in Oatly’s quest for rapid business growth and its race to IPO, we believe it has recklessly disregarded these costs by locating production facilities thousands of miles from its oat sources, and also sought to obscure the impact of shipping costs in its financial statements,” Axler wrote.
Elsewhere, Axler noted that channel checks show signs of market share loss in Sweden and the U.S. The short-seller also pointed to “minimal barriers to entry, lack of competitive advantages, rising commodity input costs, and supply challenges created partly through poorly planned production facilities.”
“As such, we believe Oatly will sorely disappoint investors and will never achieve profitability,” Axler added.
The Swedish-based oatmilk company, which made its public debut in May, saw its stock price sink nearly 5%. The stock, which hit an all-time high in early June of $28.73, is down nearly 11% since it went public.
In a statement on Wednesday afternoon, Oatly said it's "aware that a short seller is making false and misleading claims regarding the company. This short seller stands to financially benefit from a decline in Oatly's stock price caused by these false reports. Oatly rejects all these false claims by the short seller and stands behind all activities and financial reporting."
Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.