Beyond Meat: Beyond Absurd

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About: Beyond Meat, Inc. (BYND), Includes: K, KHC, NSRGY, TSN
by: Ian Bezek
Summary

Beyond Meat is approaching $100 a share after IPOing at $25 just recently.

The company has a promising story and growth trajectory, but things are getting out of hand.

Even if revenues double this year, and then double again next year, the stock would still be overpriced.

Don't let your enthusiasm for the product cloud your better judgment about Beyond Meat as an investment.

Beyond Meat (BYND) has become one of the most exciting IPOs of recent years. Despite investors waiting anxiously for the likes of Uber (NYSE:UBER), Lyft (NASDAQ:LYFT), and Zoom Video (NASDAQ:ZM), it ended up being the plant-based food maker that has launched the most sizzling IPO in recent memory.

So far, Beyond Meat has launched quite a controversy here at Seeking Alpha and elsewhere in large part related to the product's nutritional profile. Dane Bowler's Beyond Meat: Unhealthy For The Heart And The Portfolio is up to more than 1,100 comments already, for example. There you can see a vigorous debate over the relative merits of animal vs. plant protein, and whether Beyond Meat's products are an improvement or a hyped-up processed food.

I have my opinions on the nutritional debate, but let's keep this article focused on the investment case, though feel free to chime in on anything related to Beyond Meat in the comments below. Regardless of what you may think about the nutrition question, at $92/share, BYND stock is a strong sell.

Unfortunately, it seems many people are deciding to either buy or short the stock based on their view of Beyond Meat's nutritional profile and/or stance on vegetarianism vs. meat consumption. As investors, however, the stock market is not the ideal place to express our beliefs on (food) politics. Even the most devoted of vegans should steer clear of Beyond Meat stock at this price. And on the other end of the spectrum, don't think BYND stock is a short simply because you think their product isn't healthier than ground beef.

Beyond Meat's Problem: Bloated Valuation

It's no secret that consuming a high level of fiber causes some people severe indigestion. Similarly, buying stocks at unusually high valuations tends to cause an upset stomach as well. In the case of BYND stock, buyers are paying 1999-level prices for the company. But it's highly improbable that Beyond Meat will bring anything close to the sorts of growth levels necessary to make the dot.com style valuation pay off.

As of this writing, Beyond Meat is now trading for 60x trailing sales. If they double revenues this year, and then double revenues again next year, it'd still be selling for 15x sales. 15x sales, needless to say is ridiculously high for a commodity food producer, to say nothing of 60x sales today. Only the rarest of tech stocks has ever produced strong investment results starting from a 60x price/sales ratio. Count me among those highly skeptical that Beyond Meat has a longer or faster growth ramp ahead of it than other highly valued tech companies. Investors who paid nosebleed valuations for "blue sky potential" in 1999 got wiped out unless they traded their shares quickly to a "greater fool" before the mania subsided. The same should end up happening with BYND stock.

There's also the matter that Beyond Meat is not especially close to profitability. Despite charging much higher prices for their products than traditional ground meats, they are still generating relatively low margins. It's unclear when or at what point they can reach sufficient scale to become strongly profitable, but they certainly aren't near it yet, and that will make it harder for Beyond Meat to hold its gigantic valuation once the initial buzz wears off. In fact, the company's annual net loss expanded between 2016 and 2018 even as sales grew from $16 million to $88 million. That raises the question of how much of this growth is being driven organically rather than through heavy advertising spend.

Where's The Moat?

With the dot.com bubble, there was at least some plausible justification for the stratospheric valuations. The Internet was a new domain where the first movers had the chance to establish gigantic world-changing brands. Unfortunately for 1999-era investors, most of the first movers didn't turn into the huge winners. For every Amazon (NASDAQ:AMZN), there was a bunch of Yahoos or AOLs that survived but didn't become hugely profitable. And the less said of the also-rans like Excite or Global Crossing, the better. Even with the substantial first mover benefit, firms like Google (NASDAQ:GOOG) (NASDAQ:GOOGL) that weren't public in 1999 were still able to emerge and overcome the companies that had taken the early lead in key areas such as search.

Beyond Meat has arguably even less going for it than the average dot-com firm did in 1999. Beyond Meat is not the first, and it certainly won't be the last to try to make plant-based meat alternatives. There's little in the way of patent protection available, and it's also questionable that branding will really matter either. How much premium do people pay for brands on either vegetables or meat today? Sure, companies like Tyson (TSN) attempt to sell branded meat, but it's still a commodity business at heart. Most people won't pay up for a particular label on a package of ground chicken or beef. Why would we expect different for a plant-based protein?

Gardenburger originated way back in 1985 and became popular decades ago. It then bet too heavily on advertising and expansion (in 1999, fittingly enough) leading to its eventual bankruptcy. Before it went bust, it did go public - back in 1992 - based on strong sales to restaurants and a 90% annual growth rate in revenues. After Gardenburger went bust, Kellogg (K) acquired the brand and continues to sell its products today.

That's far from the only player in this space, either. You have more legacy operations such as Morningstar Farms which also is owned by Kellogg. Kraft Heinz (KHC) bought Boca Foods, maker of the Boca Burger, in 2000. Given the rising popularity of meat alternatives, Kraft reintroduced the Boca Burger last year with an improved formulation. Additionally, you have Tofurky and other privately-held meat alternatives as well. Nestle (OTCPK:NSRGY) is entering the mix, bringing its Awesome Burger vegan offering to the U.S. later this year.

If that weren't enough, you also have Impossible Foods. This one is another big threat to Beyond Meat, as Impossible Foods has raised nearly $500 million in debt and equity, and is getting widespread restaurant adoption as well. Impossible has highly credible backers including Bill Gates and Singapore's giant Temasek Holdings as key investors. Just because Beyond Meat IPOed before Impossible doesn't mean it will necessarily win the market.

There's also the interesting matter of Tyson Foods. They invested in Beyond Meat in 2016 and participated in another funding round the following year. Early in 2019, just prior to the IPO, Tyson cashed out its more than 5% stake in Beyond Meat, earning a considerable profit. Of course, given that the stock IPOed at $25 and is now trading for more than triple that figure, Tyson potentially left a lot on the table.

That said, it has been reported that Tyson got out of the business because relations had soured between them and Beyond Meat. That, in turn, happened because Tyson wants to produce their own meatless protein products that will compete directly with Beyond Meat.

This last competitor should really unnerve Beyond Meat investors, particularly at this valuation. Tyson is one of the world's leaders in selling protein - they are a dominant player in the space and have unparalleled knowledge of the field and the connections and distribution necessary to get their products adopted widely. Tyson's decision to cash in on Beyond Meat's rising valuation and launch their own competition, rather than sticking around for the post-IPO ride, speaks volumes. At the end of the day, there's little to keep Tyson, Kraft Heinz, Kellogg, and other far more well-funded firms from eating Beyond Meat's lunch.

BYND Stock: Cool Story, Lousy Investment

Again, regardless of what you think of the company's appeal, either nutritionally or from an ethics/animal rights perspective, there's an intriguing story here. It's not hard to see how BYND stock could become a popular holding. At the $25 a share IPO price, Beyond Meat was a high risk but potentially high reward opportunity.

At today's share price, the reward almost is entirely gone. The company would have to execute flawlessly against a ton of rivals, both entrenched and emerging, to grow into the valuation.

For so many new food products companies, the end goal is to get acquired by a larger rival. But Beyond Meat now costs too much for bigger companies to buy it without taking a hefty chunk of dilution. A company with a price/sales of ratio of, say, 4x can't buy something with a P/S ratio of 60x without diluting their stock and earnings drastically. Hence why you see firms like Tyson deciding to build their own competing product rather than sticking with Beyond Meat's equity.

I expect 50% or more downside for Beyond Meat over the next 12 months (50% downside would still leave shares up nicely from the IPO price after all). The float will increase over time, and if the stock price stays up, I'd anticipate that the company will do secondary offerings to raise money for more marketing and growth capex.

According to S3 Partners, short interest in BYND stock already has hit 42% of the float. Keep in mind that only a tiny portion of Beyond Meat's overall stock is publicly trading at the moment. That makes this a most crowded short position. With options trading already launched, people have prematurely piled into put options on the name, giving more juice for the current short squeeze. Once the float frees up, however, except the stock to lose its sizzle.

Consider that if Beyond Meat doubles revenues again this year - which may be optimistic - and that the market leaves the price/sales ratio at a generous but not unheard of 10x, you get to a 12-month target price in the low $30s. If anything goes wrong with the growth story, competition intrudes faster than expected, or sentiment turns down for recent high-risk growth IPOs in general, shares could go lower yet. At $25, you could make a bullish case for BYND stock. At these levels, most readers should stay clear of Beyond Meat regardless of your views of their products. The stock may be worth a short sale for a risk-seeking speculator, but with the tiny float and potential for a cult-like shareholder base developing, be prepared for potential major short squeezes along the way.

Disclosure: I am/we are long KHC. 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.