Should you buy A2 Milk Company Ltd shares after their sizeable decline?

Last week certainly was a week to forget for shareholders of market darling A2 Milk Company Ltd (ASX: A2M).

The infant formula and dairy company’s shares finished the week 10% lower than where they started it at $11.46.

What happened?

The catalyst for this decline was news that Nestle is adding to its infant formula range in China with an a2 protein-only version of its Illuma product.

This has many investors concerned that a2 Milk’s monopoly on the a2 protein theme in China is over and could result in a loss of market share.

Time will tell whether it is a2 Milk’s brand or the a2 protein that has been responsible for its success in China, but one leading broker has given its early opinion.

According to a note out Deutsche Bank, its analysts have suggested that the entrance of new competitors could increase the market overall. However, assuming a2 Milk retains its market leadership due to its first mover advantage, the company’s market share might top out at 7.5% instead of the 10% they had previously predicted.

If this were to occur, it would impact the broker’s valuation by approximately 15%.

But due to the launch being in its infancy and very few details being known, the broker has retained its buy rating and NZ$14.00 (A$13.18) price target on the company’s shares for the time being.

Should you buy a2 Milk shares?

Uncertainty is not a good thing for shares with a significant amount of growth built into their shares.

While I think the a2 Milk brand is strong enough to fend off competition and this sell-off is arguably a buying opportunity for investors, I’m not convinced that the selling is over just yet. Especially if any of its other rivals come out in the near future with similar products of their own.

I expect it could be a similar story for Bellamy’s Australia Ltd (ASX: BAL) shares as well in the short-term, unfortunately. This could make it worth waiting to see if they drop further before hitting the buy button.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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 Scott Phillips.

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