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Oatly Group (OTLY -19%) investors are crying over spilled oat milk today after the oat-based dairy products company disappointed with its Q3 earnings report. Let's start with the good news: the company reported a smaller loss than expected. However, revenue was well shy of analyst expectations. That's not to say that growth was bad; it was quite robust at 49% yr/yr to $171.1 mln. However, the Street was expecting more. The miss arrived in spite of a $4.4 mln FX benefit.

• It's important to note that full year revenue guidance was reduced to $635+ mln, down sharply from prior guidance of $690+ mln. This reduction was significantly greater than the Q3 miss, which implies that Oatly is also guiding Q4 revenue below expectations. This rough guidance may account for the lion's share of the drop in the stock price today.
• Oatly's did say that global consumer demand remained strong. Part of the problem is that Oatly is rapidly increasing production expansion to keep pace with demand, and there were some production hiccups in Q3, particularly at its Ogden, Utah plant resulting from temporary mechanical and automation issues in late August. Also, its foodservice segment saw closures in Asia due to the Delta variant, and a truck driver shortage in the UK hurt results there.
• This Swedish-based company is the world's original and largest oatmilk company. Furthermore, it also sells ice cream, yogurt, cooking creams, spreads, and on-the-go drinks. A lot of excitement surrounded its IPO debut in May 2021, but its stock has underwhelmed since then. The IPO priced at $17, opened at $22.12, and ran to $29 by mid-June, but it is now trading below $10.

Why has the stock performed poorly? A big factor was a July 14 report from short seller Spruce Point. The firm argued that Oatly overstated its revenue and margins, questioned how proprietary Oatly's production process is, and claimed that the company overstated its growth story in China. (Oatly's comments about foodservice sales in Asia are probably making investors nervous.) Also weighing on the stock is a frothy valuation at 11x 2021 sales, even after the pullback in the stock. That's a high multiple for a food company, and an unprofitable one at that. The IPO had a heavy float at 84.4 mln ADSs. We prefer deals with 20 mln shares or fewer.

The main question for investors is whether the stock falling below $10 compensates for the risks discussed above. We would probably avoid it for now, at least until the stock's price stabilizes and trades sideways for a few months. Oat milk is the fastest growing segment within the plant-based milk category, and OTLY has had success expanding into other food categories while stepping up its production capacity. However, staying on the sidelines is probably wiser at this point, as today's Q3 report adds to our uneasiness.