October was a rollercoaster month for the A2 Milk (ASX:A2M) share price

It was a very eventful month for A2 Milk shares in October…

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It certainly was an eventful month for the A2 Milk Company Ltd (ASX: A2M) share price in October.

The embattled infant formula company’s shares ended the month one cent higher than where they started it at $6.25. However, that is only part of the story.

What happened to the A2 Milk share price in October?

The A2 Milk share price certainly was on a rollercoaster ride last month.

It was down as much as 7% month to date, then stormed higher to be up as much as 19% for the month, before ending the period broadly flat.

Investors were bidding the A2 Milk share price higher in the middle of October following the release of an update out of junior infant formula company Bubs Australia Ltd (ASX: BUB).

Like A2 Milk, Bubs has been struggling in recent quarters. This was due to disruption in the daigou channel, the increasing popularity of domestic infant formula brands in China, and subdued demand.

However, the company returned to form during the first quarter of FY 2022, reporting a strong increase in sales (albeit from a small base). The majority of Bubs’ growth came from channels relating to the China market. This sparked hopes that the worst was now behind A2 Milk.

However, the A2 Milk share price quickly gave back those gains following the release of its investor update late on in the month.

What was the update?

A2 Milk’s investor update laid out its expectations for the coming years. And as you may have guessed from the A2 Milk share price reaction, the next few years are not going to be as positive as many were hoping.

The company has set itself a medium term (≥ 5 years) target of growing its sales to NZ$2 billion. While this is a big increase on FY 2021’s COVID-impacted sales of NZ$1.2 billion, it is only a modest increase on FY 2020’s pre-COVID sales of NZ$1.73 billion.

In addition, management revealed that its EBITDA margins will “probably” be in the teens in the medium term due to expected market conditions, investments, and innovation. This is significantly weaker than FY 2020’s EBITDA margin of 31.7%.

Management also warned that there was still some uncertainty with these growth targets. It said that “because of these uncertainties and the range of potential outcomes, it is very difficult to define future state targets and when they will be achieved – the path is also unlikely to be linear.”

Where next for A2 Milk shares?

Opinion is largely divided on where the A2 Milk share price will go from here.

The bulls at Bell Potter have a buy rating and $7.70 price target on its shares, whereas the bears at Macquarie have an underperform rating and $5.20 price target. This compares to the current A2 Milk share price of $6.26.

Time will tell which broker makes the right call.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk and BUBS AUST FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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