The a2 Milk Company Ltd (Australia) (ASX:A2M) share price is rocketing, up 283% from $1.80 to $6.89 in the past 12 months. At least one broker thinks shares could be worth as much as $7.25.
A history of multiple profit upgrades and ambitious forecasts for growth again this year have seen a2 take off, not unlike the run that Bellamy's Australia Ltd (ASX: BAL) shares had back in 2015.
At today's prices however, and given the explosion of interest and proliferation of competitors in the sector, investors would be prudent to ask whether A2's winning run can continue.
With capital rushing into the sector, I think a likely outcome is that competition intensifies and profit margins for sellers deteriorate. Manufacturers are also likely to end up with more pricing power, in my opinion, as supply rather than demand is currently the constraining factor.
I have recently been trimming some of my a2 holdings for just these reasons. Over the long term, there is certainly potential for a2 to grow considerably larger again.
However, given the hype it's getting at the moment, I think investors should be wary of the risk of either overpaying, or committing too much of their portfolio to the company.
