How Beyond Meat Is Worth $21 Billion

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About: Beyond Meat, Inc. (BYND)
by: Anh Hoang
Summary

Beyond Meat is a real disruptive company in the global food industry.

The company popped by 160% in its first trading day.

Although valued at 50x sales, Beyond Meat can still deliver value to shareholders if it sustains current growth.

Its valuation can reach $21 billion in the next five years.

Beyond Meat (BYND), one of the first innovative companies which produces fake meats, has just recently gone public. Its meats are made directly from plants, helping to address global issues relating to human health, animal welfare and climate change. Both the core concept and products are quite enticing, popping up the share price by more than 160% on the first trading day. Is that too much optimism for the company which is still unprofitable and trading at more than 50 times its sales?

The Unique Disruptive Food Company

It is not extraordinary when Beyond Meat receives a lot of hype in the stock market. With the unique concept and products to address some of the very important of the world's issues, Beyond Meat can be disruptive in the food industry. It produces plant-based meats, with the same taste, texture, and aroma as the animal-based meats. The company’s flagship product is The Beyond Burger, the world’s first 100% plant-based burger. While pea protein was its main ingredient, the burger also had vegetable oils, plant fiber, yeast extract, and natural flavor binders. Consumer Reports mentioned that the Beyond Burger looked exactly like burgers with raw beef. “The Beyond Burger patty is thick, like a real burger, and has a fatty mouthfeel—that’s from coconut oil. The outside doesn’t get crispy like real meat, but that might be something you could remedy by grilling it.”

Beyond Meat is trying to target not just vegetarians but also the meat lovers around the world. Thus, its target market is the global meat industry with a total market value of $1.4 trillion. Many meat lovers who are health conscious might switch a part of their meat meals into meatless-meat meals. Its main ingredient is pea protein, a high-quality protein with great iron source. Pea protein not only keeps us fuller longer than both carbs and fat, but it also helps to build muscle mass, aid weight loss and support heart health.

Spectacular Growth at a High Valuation

Founded ten years ago, Beyond Meat has experienced high growth in sales. In the past three years, its revenue has grown 5.4x, from only $16.2 million in 2016 to $87.9 million in 2018. In the first quarter of 2019, the total net revenue also experienced year-over-year growth of around 200%. The significant 2018 revenue growth was due to the increased sales in The Beyond Burger and Beyond Sausage. According to its S-1 filing, Beyond Meat has only generated gross loss until 2017, meaning it spent more money to buy raw materials and production than it earned from selling products. The company said that as it has not been able to meet the demand for its products, the company had to scale its production as fast as possible. As production capabilities increased and revenue experienced high growth, Beyond Meat managed to deliver gross profit of $17.5 million, 20% margin, in 2018. However, due to a 100% increase in SG&A (Selling, General and Administrative Expenses), the company generated losses of nearly $28 million.

Beyond Meat does not employ a lot of leverage. As of December 2018, it had nearly $30.4 million in total debt, including $19.4 million in long-term debt, $6 million in revolving credit facility and $5 million in equipment loan. The debt/asset stayed at a quite conservative ratio at only 22.7%. The total interest-bearing debt is even less than the amount of working capital, $77.66 million as of December 2018.

At $72.25 per share, Beyond Meat is valued at $4.55 billion, a staggering 52x its 2018 revenue. It is a super high valuation, even for a disruptive company. Netflix (NFLX) and Facebook (FB), the two tech disruptive juggernauts, are valued at only 9x-10x sales.

Valuation Scenario

In order to determine whether the current stock price is cheap or expensive, let’s do a growth scenario with the assumptions below.

Assumptions

Revenue growth

200%

Gross profit

20%

SG&A growth

100%

R&D growth

100%

Other expenses

50%

Those assumptions are derived from the current company's growth. Revenue growth is 200% year over year, equivalent to the average year-over-year growth in the first quarter of 2019. The gross profit is similar to the current gross profit. The SG&A growth and R&D growth are also equivalent to the current growth. Other expenses are assumed to have increased by 50% annually.

We come up with this table:

millions

2018

2019

2020

2021

2022

Revenue

$87.9

263.7

791.1

2373.3

7119.9

Gross profit

$17.58

52.74

158.22

474.66

1423.98

SG&A

$34.5

69

138

276

552

R&D

$9.60

19.2

38.4

76.8

153.6

Other expenses

$1.50

2.25

3.375

5.0625

7.59375

Operating income

($28.0)

($37.7)

($21.6)

$116.8

$710.8

Earnings multiple

30

30

Market Valuation

$3,503.9

$21,323.6

With the above assumptions, by 2022, Beyond Meat can generate more than $7.1 billion in revenue. At that time, the operating income would already be positive, at $710.8 million. With an operating multiple of 30x, Beyond Meat can have a fair value of $21.3 billion in 2022.

Thus, if the assumption of operating financial figures turns out to be correct, from the current valuation of $4.55 billion, Beyond Meat can deliver a 47% compounded annual return to shareholders in the next four years.

Potential Risks

Of course, any investments carry a certain amount of risks, especially in any disruptive companies with tremendous growth potential. For Beyond Meat, the biggest risk is the ability to generate such a super high growth. If Beyond Meat cannot sustain the future high growth, then the valuation of fair value should be adjusted downward significantly. In addition, any immediate jumps in the share price will normally be followed by the correction in the near future. Thus, investors should be careful of the sharp drop in the short term.

Key Takeaway

Beyond Meat is really a disruptive food company. That is why it receives so much optimism in the stock market. If Beyond Meat can keep up the spectacular growth and deliver at least a similar gross margin like in 2018, it can be worth more than $21 billion by 2022. However, as discussed above, in a short run, the stock price might drop sharply after the recent significant increases.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.