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Here's why the A2 Milk (ASX:A2M) share price lost 52% of its in value in 2021
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James Mickleboro is an investment writer and analyst who has worked with The Motley Fool Australia for 10 years, covering ASX shares, market news, broker research, dividends, growth stocks, and long-term investing ideas.
Over that time, James has written extensively about Australian equities and developed a particular focus on helping everyday investors understand the stories behind share price moves, company announcements, broker views, and broader market trends.
His best investment recommendation was identifying Afterpay while it was still a small-cap growth share, before its rise into one of Australia’s biggest technology success stories. His worst investment lesson came from CSL Ltd (ASX: CSL), where he was burnt by believing management could turn the business around sooner than the market ultimately allowed.
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Key points
A2 Milk shares were sold off again in 2021
Weak demand and excessive inventory weighed on the infant formula company's performance
Opinion is divided on where its shares are going in 2022
For a second year in a row, in 2021 the A2 Milk Company Ltd(ASX: A2M) share price had a disastrous 12 months.
The infant formula company's shares crashed 52% lower over the period.
Why did the A2 Milk share price sink in 2021?
Investors were selling down the A2 Milk share price last year amid the further deterioration in its performance.
For example, during FY 2021, the company reported a 30% decline in revenue to NZ$1.16 billion and a 79.1% reduction in net profit after tax to NZ$80.7 million. This was driven by structural changes in the daigou channel, softer demand in China, and a major write down of its inventory to address excess stock.
Also weighing on the A2 Milk share price was the company's strategy day event which outlined its plans for the future. That update confirmed that the company does not expect its sales and profits to rebound as quickly as many investors were hoping.
A2 Milk 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.
It also 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%.
In addition, management warned that there was still some uncertainty with these growth targets. It said: "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."
Will things be better in 2022?
Opinion remains divided on whether 2022 will be any better for the A2 Milk share price.
The team at Bell Potter is positive and has a buy rating and $7.70 price target on its shares. Whereas the team at Macquarie has an underperform rating and $5.20 price target.
