Beyond Meat (BYND) has had a sizzling time since its IPO on 2 May. From its IPO price of $25, the stock has more quintupled to $138. Compared to fellow "unicorn" IPOs Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT), Beyond Meat has undoubtedly been a stellar success (so far).
For those who are unfamiliar with the company, Beyond Meat serves up plant-based faux meat in burgers, sausages, and crumbles. The company brands itself as "The Future of Protein" and has partnered up with restaurants and distributors such as Carl's Junior, A&W, TGI Fridays, Giant, and Natural Grocers. It runs a strong marketing campaign, with a team of "Beyond Ambassadors" who are sports professionals, including professional basketball player Kyrie Irving, professional football player Deandrie Hopkins, etc.
The aim of this article is to cut through the hype and bluster of Beyond Meat's IPO, and to look at the company from a longer-term perspective. The company has undoubtedly rode the wave of "Veganism" with aplomb, but a warning for investors - valuations are extremely stretched, which could quickly send its share price reverting down to more palatable levels. I believe the only thing that is fueling the share price rally at the moment is the army of shorts in the stock caught offside.
In comparing Beyond Meat's valuations against its peer group, the most difficult part lies in determining the peer group. The most similar competitor to Beyond Meat is Impossible Foods as both solely develop Vegan products, but the latter is not publicly listed. As such, the next ports of call would be Consumer Staples companies such as Nestle (OTC:NSZTY), Kraft Heinz (KHC), Hormel Foods (HRL) and Tyson Foods (TSN), all which are either developing their own Vegan products or have invested in Vegan start-ups. I am cognizant that these four companies sell a diversified range of products, hence this comparison has its limitations.
[6/11 Editor's note: The EV/Sales numbers in the following section have been corrected by the author.]
Beyond Meat is trading above 40x Enterprise Value / Sales, compared to its peers, which are trading at an average of 2-3x. Profit margins are (understandably) negative since the company is still in its early years, but with investors pricing in such astronomical sales growth in the company, patience might wear thin if Beyond Meat goes through an unimpressive fiscal quarter. Note also that as Beyond Meat grows in size and scale, more Capex will be expected to deal with logistical and transportation demands, which will place further pressure on the company's profit margins.
|Stock||Enterprise Value / Sales||Profit Margin|
Source: Yahoo Finance
As mentioned earlier, Beyond Meat has rode the wave of Veganism with aplomb and has a deserving head-start against its peers. However, the market might be blinded to the competition that Beyond Meat may face moving forward - the battleground for alternative proteins is heating up.
Nestle is planning to develop a meat-free burger using wheat and soy proteins, and you can wash it down with purple walnut milk or a spirulina latte. Kraft Heinz has invested in 5 vegan start-ups via its incubator programme, and the products include seed-based snacks and plant-based yoghurt. Hormel Foods is looking to invest in the plant-based protein market and has rolled out "Blend Burgers" via its subsidiary Applegate. Tyson Foods used to hold a stake in Beyond Meat and has since sold it; the company has invested in plant-based meat companies Memphis Meats and Future Meat Technologies.
Impossible Foods has rich investors in the form of Bill Gates and Singapore sovereign wealth fund Temasek Holdings, and competes with Beyond Meats directly by supplying to restaurants such as Burger King and White Castle. Soon, both Beyond Meats and Impossible Foods could well face a very plausible situation where fast food restaurants develop their own plant-based burgers, therefore cutting them out of the equation. McDonald's (MCD) has already started selling its own Vegan burger in Germany called the Big Vegan TS.
The global plant-based protein market is expected to reach $10bn by 2022, and to grow at a CAGR of 6.7% from 2017 to 2022. Yes, the statistics may look attractive, but many companies are leaning in closer to get a slice of the pie, which may be bad news for Beyond Meat.
At this juncture, I believe the remarkably elevated short interest in Beyond Meat stock has been fueling its rally. As of 7 June, short volume ratio - measured as Total number of short shares traded divided by the total shares traded each day - was at 25.3%. According to Bloomberg, almost 5.9 million shares of Beyond Meat are held by short sellers, or 51.3% of the float, representing $583 million. A bout of short covering could have helped push the stock price almost 39% higher after the company reported earnings on 7 June, which more or less came in within expectations.
For investors holding the stock, I suggest taking advantage of the spectacular rally to take money off the table. Valuations look extremely lofty, and the stock feels vulnerable to any bad news that might burst this bubble.
For investors waiting on the sidelines, that may not be a bad thing, as it is honestly difficult to both buy or short the stock. Buying the stock at current levels feels like a game of Who's the Greatest Fool, while it is beyond expensive to short the stock with borrowing costs estimated at 68% as of 30 May. Options volatility (30-day implied vol at 112) makes buying a Put option extremely costly as well.
For the extreme contrarian however, there is a trade idea to consider: buying a vastly out of the money put option on Beyond Meat. For a 17 Jan expiry, a put strike of $35 (note that the IPO price was $25) costs $1.25 per contract, or slightly less than 1% on the notional, based on the last price of $138.
Beyond Meat, kudos to them, has soared ahead of their competition in being one of the first movers in the fast-growing alternative proteins industry. Their stock price quintupling in about a month must have been beyond the company's wildest dreams. Investors should be wary about the hype and bustle that typically surround new IPOs, and look at the company for what it may be worth 3-5 years down the road.
The alternative proteins industry is not one with high barriers of entry, and some of their competitors have deep pockets or are backed by investors with deep pockets. It will be foolish to discount the possibility of a more saturated and competitive landscape going forward, which should raise doubts over the high growth rates currently priced into Beyond Meat.
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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.