We came across a bearish thesis on SunOpta Inc. (STKL) on Substack by Idea Hive. In this article, we will summarize the bears’ thesis on STKL. SunOpta Inc. (STKL)’s share was trading at $7.26 as of Nov 6th.
SunOpta (STKL) presents an interesting short opportunity based on a potential downturn in the plant-based milk industry. Once undersupplied and experiencing rapid growth during the pandemic, this sector now faces the risk of oversupply as demand stabilizes. With production capacity having expanded significantly, particularly by companies like STKL, prices in the plant-based milk market may come under pressure, which could negatively affect the growth and profitability of producers. STKL’s Q3 results, however, showed continued strong performance, with a 16% increase in revenue driven by a 21% boost in volume, largely from the food service channel. This growth was supported by a new production line at STKL’s Midlothian facility, which doubled its output compared to the same period last year and increased production by 20% sequentially. Management remains optimistic, reaffirming 2024 guidance for mid-teens growth in revenue and EBITDA. The company also announced a major expansion of an oat milk product into 6,700 stores for a top coffee chain, utilizing nearly all of the oat extraction capacity at its Modesto facility.
Despite these results, the short thesis remains intact as the potential for industry oversupply continues to loom. Recent data suggest that plant-based milk retail sales have declined by 5% in the year leading up to mid-July, indicating weakening demand in retail channels. Though food service demand is growing and has helped offset declines in retail, there are concerns about STKL’s heavy reliance on the food service channel. While management asserts that the majority of its sales come from untracked (food service) channels, conflicting growth rates in retail and food service raise questions. STKL’s performance in tracked channels suggests that the company may be more reliant on retail than stated, possibly up to 40–50% of revenue, similar to peer OTLY. The lack of a detailed breakdown in STKL’s earnings calls about channel performance, despite the food service channel’s importance, adds to the uncertainty.
Another factor to consider is the sustainability of the recent surge in food service volumes. Much of this growth has come from new product launches and market share expansion, with management stating that 50% of Q3 revenue growth was driven by new products. However, STKL already holds about 70% of the shelf-stable plant-based milk market, making further market share gains challenging. Additionally, given current consumer spending trends, it is unclear if new product launches will continue to drive strong food service growth. The rapid volume growth in recent quarters may be masking some underlying weaknesses in STKL’s business, and this growth could normalize soon.
In terms of valuation, STKL currently trades at 12.1x 2024E EBITDA, which appears high for a company with a history of profitability challenges and cash flow volatility. While management’s 2024 guidance reflects an optimistic view, there is skepticism that these projections account for the full impact of an anticipated market downturn. It is important to monitor industry data, particularly competitor OTLY’s Q3 results, to reassess the short thesis.
While SunOpta (STKL) has demonstrated resilience in recent quarters, the bearish thesis is based on the expectation that the plant-based milk industry is approaching an oversupply, which could negatively impact STKL’s pricing, growth, and margins. Increased production capacity now exceeds demand, potentially leading to lower prices. Moreover, STKL’s reliance on foodservice growth may not be sustainable, potentially hiding underlying weaknesses in the business.
Please keep in mind that these aren’t Insider Monkey’s opinions, and we merely summarized the bears’ thesis in this article.
SunOpta Inc. (STKL) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 23 hedge fund portfolios held STKL at the end of the second quarter which was 17 in the previous quarter. While we acknowledge the risk and potential of STKL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than STKL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.