4 reasons why Oatly will soar 79% amid a boom in oat milk sales, according to BofA

• Shares of Oatly could soar as much as 79% amid a boom in oat milk sales, according to Bank of America.
• "Growth in oat milk is evident in Starbucks having to double its order of oat milk from Oatly to better service demand," the bank said in a Tuesday note.
• These are the four reasons why Oatly is primed for more gains ahead, according to the note.
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Oatly has had a rough start since it went public in May, with the stock trading below its $17 IPO price throughout August.

The weakness in shares could be attributed to both supply constraints that limited Oatly's ability to meet demand, and ongoing short-seller commentary from Spruce Point Capital.

But Bank of America thinks Oatly is working through its supply constraints and could soar as much as 79% from Thursday's close. In a note on Tuesday, the bank reiterated its Buy rating and $32 price target after it met with Oatly's management team.

Bank of America had four key takeaways from that meeting that suggests Oatly is about to turn the corner in boosting its production capacity and better meeting demand.

Those four key takeaways were:

1. Oatly's main priority is to ramp production and continue to build capacity for oat milk.

The company appears confident it will be able to achieve its forecasted demand in the second half of this year, citing progress in its new Ogden, Utah production facility and its hybrid facility based in Singapore. Oatly is targeting production of 50 million liters per month by the end of the year.

2. Demand for oat milk shows no signs of slowing down.

"Growth in oat milk is evident in Starbucks having to double its order of oat milk from OTLY to better service demand and retail scanner data from Nielsen with dollar share of dairy alternatives at 17.5% for the 12wks ending July 31, compared to 11.3% in 2020," BofA said.

3. Oatly's manufacturing process is highly differentiated versus peers and gives it an edge versus competitors.

"Oatly is confident it will be able to stand out in a crowded market given that it doesn't rely on syrups or other non-natural products to create oat milk unlike other competitors," the note said.

4. There are plenty of white space opportunities for oat milk in the future.

"Oatly did discuss future white space opportunities that involve producing oat milk products that are high in protein or contain antibiotics," BofA said. Oatly has also managed to expand its product lineup to include oat-based yogurts and ice creams.

While Oatly does trade at a premium valuation, BofA believes its warranted as oat milk gains more share of drinking milk occassions and as Oatly continues to add margin accretive in-house production capacity, according to the note.