Shares in ex-market darling A2 Milk Company Ltd (ASX: A2M) traded slightly higher today, although the long-term trend still doesn’t look too flash.
A2’s market valuation has fallen over 74% since its high last year on the back of four consecutive profit downgrades with issues arising from COVID-19.
A2M share price
Is a recovery likely?
The general consensus seems to be that a recovery of some magnitude is a probable outcome, with the obvious catalyst being the reopening of international borders that could revive its much-needed daigou channel.
The keyword here is the magnitude of this potential recovery however.
While I was previously quite optimistic on the recovery play due to the previous strength of A2’s brand, this is actually one of the main reasons why my conviction has changed recently.
Keeping in mind that the majority of A2’s growth has come from its infant milk products bought by Chinese customers, there have been some recent hints that could suggest that A2’s brand might not be in the same positive light as it was previously.
This could be for multiple reasons, but it’s partly due to Chinese consumers embracing nationalism and favouring domestic products rather than imported alternatives.
Where to now?
Hypothetically, if the growth story in China doesn’t emerge as strong as it once was, A2 would likely need to look for other geographic markets to enter in order to grow and attract a higher share price multiple as it did previously.
As my colleague, Raymond Jang pointed out in his recent article, A2 seems to have a small foothold in the US market, but it’s a long way off the size of its Chinese segments in terms of revenue contribution.
There also appears to be some formidable competitors already in the space. Swedish-based oat milk maker Oatly (NASDAQ: OTLY) just recently listed last week and it appears the business has been performing well recently.
That being said, A2’s products compared to vegan-based oat milk seem to be quite different, which would likely attract different types of consumers.
Although, the general positive thematic around veganism could suggest that this may act as a headwind for companies like A2 as part of its target market switches to non-dairy alternatives.
Whatever the case, I’m happy to sit on the sidelines for the moment. With international travel off the cards for quite some time, I believe there could be better opportunities elsewhere.
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