Oatly Accused of Overstating Revenue by Activist Short-Seller Firm

Oatly Group AB (OTLY), an oat-based dairy producer, has been accused of misrepresenting its revenue and margins by short-seller Spruce Point Capital Management. Shares fell 5.2% on the news to close at $19.48 on July 15.

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Oatly was listed in May 2021, and since then, the company’s stock had gained almost 13.8% up until the end of last week. This week alone, the stock has lost 15.3%, with an 8% drop in the two days following the news. (See Oatly Group stock charts on TipRanks)

On July 14, Ben Axler of Spruce Point pointed out discrepancies in Oatly’s accounting practices, and the firm published a detailed report on Oatly’s alleged malpractices.

As per the report, OTLY inflated revenue by $6 million in 2018 and also left out logistic and shipping expenses from its 2020 gross profit calculations, thereby inflating margins by around 640bp.

Additionally, OTLY has also been accused of overstating Capex and misleading investors about its sustainability practices.

The report said, “We observe periods of large divergence in revenue and accounts receivable growth rates at Oatly. This is a classic sign of potential accounting shenanigans and is often cited as a top red flag to predict accounting scandals.”

In its defense, Oatly said in a statement to CNBC, “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.”

Following the news, Oppenheimer analyst Rupesh Parikh maintained his Hold rating on the stock and said, “The contents of the Spruce Point Capital report does not change our positive longer-term thinking on OTLY’s prospects or ability to scale its margin. Right now, however, many Consumer Packaged Goods players are clearly struggling with significant cost pressures that are difficult to offset over a short time period through pricing and other actions.”

Another analyst, Michael Lavery of Piper Sandler maintained his Buy rating on the stock with a price target of $30, implying 54% upside potential.

Despite the malpractices pointed out by the activist short-seller’s report, Lavery believes that Oatly’s brand equity and pricing power command a high valuation.

Furthermore, he added that the classification of shipping costs in SG&A instead of COGs is inconsistent with peers but isn’t “sinister or deceptive.”

Overall, the stock has a Moderate Buy consensus rating based on 7 Buys and 6 Holds. The average Oatly Group price target of $30.60 implies 57.1% upside potential to current levels.