Is the party over for the a2 Milk Company Ltd (Australia) and Bellamy's Australia Ltd share price?

a2 Milk Company Ltd (Australia) (ASX:A2M) and Bellamy's Australia Ltd (ASX:BAL) have found themselves in the middle of a sweet supply-demand dynamic.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Having just finished reading another broker note extoling the fabulous growth opportunity awaiting a2 Milk Company Ltd (Australia) (ASX: A2M) it's worth reminding investors about the limitations of relying on brokers to form your investment opinion…

But firstly, a quick recap on recent goings-on

The share prices of a2 Milk Company Ltd (Australia) and Bellamy's Australia Ltd (ASX: BAL) have enjoyed spectacular gains in the past year. Since listing on the ASX in April 2015, a2's shares have rallied over 190%. Meanwhile, in the past 12 months Bellamy's stock price has jumped a phenomenal 690%!

The share price gains have been in response to both companies finding themselves in a "sweet spot". Both companies produce baby formula and it appears that Chinese consumers have started buying these products in unprecedented numbers.

This has led to upgrades from both companies and it's also led to brokers and analysts getting more excited about the prospects for Australian baby formula with the abandonment of China's one-child policy just adding to the bull case for the future demand by Chinese consumers for baby formula.

Back to reality

For investors who choose not to get swept up in the hype of "demand-driven" analysis, they will remember that a market place doesn't just depend on demand but equally it depends on supply.

The open capitalist economic framework is exceptionally well adapted to limiting the potential for companies to earn excessive profits. This is because wherever profits are high, and barriers to entry are low, competitors will never be too far away.

Indeed, investors need look no further than the recent announcement by Blackmores Limited (ASX: BKL) that it too will begin selling baby formula, to see market economics at work.

So, although the near term situation may see demand continue to outstrip supply and provide a backdrop of fast growth rates and excess profits, investors shouldn't be at all surprised if in the medium term competition erodes much of the current market dynamics.

Indeed, investors need look no further than the recent history of BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) to realise the effect an increase in supply can have on profitability.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »