In the recent past, we have seen several IPOs of some huge corporations. We saw IPOs that were very successful as well as IPOs that weren’t so successful like Lyft (Nasdaq: LYFT) or Uber (NYSE: UBER). But in the recent past it was especially one company that is trading on the stock exchange for about a month and really took off. We tend to use exaggerations quite often, but in this case, we have to use superlatives to describe the stock price development. In about one month, the stock gained 580% - a rise that even would have made Bitcoin (BTC-USD) jealous. Last Friday, the stock increased almost 40% in a single day and on Monday again 23% (at the time of writing). Of course, I'm talking about Beyond Meat (Nasdaq: BYND).
And there's good reason I'm mentioning Bitcoin here. In January 2018, I published my first and only article about Bitcoin where I tried to analyze the hype and bubble. Considering the development in the past few weeks, I think it's time to write a second article about an ongoing hype and analyze a similar situation once again.
Beyond Meat: The Company Beyond The Hype
To understand what we are talking about, we first have to look at the company. And we already go one step further than most people in a typical hype – by looking at the underlying company, its products and the fundamentals and not just looking at news headlines, the development of the asset price or the hype itself.
Beyond Meat was founded in 2009 as a California-based start-up and is now a food company that manufactures, markets and sells plant-based meat products mostly in the United States. The company’s mission is to shift from animal-based to plant-based meat. Products of Beyond Meat include Beyond Burger, Beyond Sausage or Beyond Beef Crumbles, and are sold at more than 30,000 retail and food service outlets worldwide. With its 250 employees, the company generated $88 million in revenue in 2018, but is not profitable so far (lost $30 million last year). For 2019, analysts estimate $220 million in revenue with the range of estimates being between $210 million and $232 million.
When looking at the last few weeks and the share price development, one simple idea suggests itself to every rational investor: There must have been some fundamental news between the time of the IPO and right now to justify a 5.5 times higher valuation of the stock. On Thursday, the company reported its first quarterly earnings after hours which led to a 40% increase in the stock price the next day. But when comparing the actual revenue and EPS with the estimates, we can see that the company could beat revenue as well as non-GAAP EPS – but both numbers don’t really justify a 40% increase. Beyond Meat could beat revenue expectations about 3.5% and non-GAAP EPS about 7%. And GAAP EPS was even a loss of -$0.95 and missed expectations by $0.80.
One can speculate if the IPO price was so wrong and the underwriting companies valued Beyond Meat too low. But the fundamental data is not supporting that hypothesis. We also see no fundamental information within the last few weeks that might justify such a dramatic price increase and we are probably left with only one explanation: We are witnessing another hype.
The Current Hype
In my article about Bitcoin I identified several aspects we are usually seeing during a hype. I was building on the works of Jackie Fenn and Mark Raskino who published Mastering the Hype Cycle in 2008 as well as Robert Shiller’s Irrational Exuberance.
(Source: Own work, orignally published in January 2018)
As a starting point in any hype, we always need an innovation trigger (doesn’t have to be a technical revolution) and a new and exciting product as well as a compelling story built around the product. In case of Beyond Meat, we have a new and exciting product: Burgers and sausages that are like meat, with the difference of being not animal-based but plant-based instead. A new product alone however is not enough to create hype as new products are introduced again and again. The much more important aspect is the compelling story.
The real hype that leads to an asset bubble can only occur when expectations about an asset (and future revenue and profit) reach astronomical levels. Only in this case the asset price can skyrocket in order to reflect these completely unrealistic expectations. In case of Beyond Meat we see several ingredients for such a compelling story:
- The current meat market has a market value of more than $1 trillion and is expected to grow for the next few years. It's quite easy to imagine Beyond Meat taking a portion of this market and generating billions in revenues.
- We have an existing trend to eat healthier food and probably get away from animal meat. Based on these trends some experts see the end of the meat market as we know it and see a total revolution within the next two decades.
- JPMorgan (NYSE: JPM) is viewing Beyond Meat as an extraordinary opportunity and sees the company as a true disruptor. Jefferies (NYSE: JEF) sees Beyond Meat also positioned for rapid and sustainable growth and Barclays (NYSE: BCS) even sees the potential to revolutionize an entire market. With expectations that the market value will increase 100 times within the next 15 years and billions in revenues for Beyond Meat, extremely high valuations can be justified.
We certainly have all the ingredients we need to create a compelling story that could lead to expectations of astronomical and almost infinite growth for Beyond Meat. But that by itself is not enough to build the bubble and create the hype. The mass media plays a very important role: If I have to research myself on the meat market, expectations for the future and potential revenue we will never see a hype as most people don’t even know how to analyze companies or where to find the information or – even more important – wouldn’t even have heard about Beyond Meat. The compelling story has to be spread by the mass media. We can start by looking at the data from Google Trends: The interest has spiked around the time of the IPO and has since then gone back again, but search interest is still a multiple of the time before the IPO. The search volume for different countries and different categories is still 5 to 10 times higher than before the IPO.
(Source: Google Trends)
We also are at the point where many newspapers, radio stations and TV shows and the mainstream media are picking up the story. And I am not talking about investing-related media. As far as I know, one can buy Beyond Meat’s products here in Germany only at Metro and for a very short time at Lidl, but the retailer obviously underestimated the demand completely, which led so some anger among customers. And although only very few people actually bought the products or know about Beyond Meat, many TV stations and newspapers picked up the story in the last few days and have written about the great success of Beyond Meat.
Aside from mass media coverage, the forming of very similar opinions also is important for a hype. On Seeking Alpha we find bullish ratings before the IPO, but in the last few weeks the majority of ratings is very bearish, and the comments I read so far, I would also describe as rather mixed. So at least on Seeking Alpha the uniform bullishness necessary for hype is missing – but maybe we are smarter than the crowd. However, on Tipranks the investor sentiment is very positive. At StockTwits the sentiment is 54% bullish (it has been almost 100% bullish around the IPO time). We see strong signs of forming very similar opinions, especially if we leave out investment-related sites, but there's probably more potential for increased media coverage and more bullishness.
Difficult Predictions, Competition and Other Risks
I see many problems Beyond Meat and its investors could face in the years to come – including lawsuits, dilution of outstanding shares, competition or scandals – but will pick out only two major threats.
The Problem with Predictions
We all know that it's difficult to make predictions – especially about the future. But it's what we do here on Seeking Alpha all the time. And there's a huge difference if I try to predict the future of a company that has existed for several decades or if I try to predict the future of a young, fast-growing company. The current expectations about the future revenue and profit of Beyond Meat are the result of several assumptions, which are all doubtful. Investors are trying to estimate how an entire industry might develop over a very long time and seem to ignore completely that many different factors could have huge effects on the outcome. The behavior of competitors, new trends in the way we consume and eat our food or several scandals might influence the business model of Beyond Meat substantially. I basically know nothing about that particular market and won’t make any predictions. I just like to point out that there's a good chance that things turn out completely different than imagined and it's always dangerous when predictions and estimates are built around the best scenario imaginable.
Competition and Moat
A second major problem are the company’s peers and competitors. Even if the underlying trend is predicted correctly and we will see a major shift away from animal-based meat, Beyond Meat is and will not be the only company operating in that market segment. If this is the beginning of a major trend, we will see a lot of competitors entering the market in the next few years because that’s how capitalism works. And we don’t know if a competitor will have a product that tastes better or if companies with huge marketing budgets will make it extremely difficult for Beyond Meat to succeed. Right now, Impossible Foods is the biggest competitor of Beyond Meat, but there are other major players in the food market that can be more severe competitors to Beyond Meat. Last week, Nestlé (OTCPK: OTCPK:NSRGY) announced its plans to launch a plant-based burger and other companies might follow.
As long as Beyond Meat doesn’t manage to create some form of economic moat around its business, it will be extremely difficult to achieve the profitability investors are currently hoping for. And although some investors might not want to hear that right now (or don’t even think about it), the business of Beyond Meat is not really enabling huge economic moats. Switching costs and network effects seem almost impossible for this kind of business, and as a small company cost advantages also are unrealistic right now. I only see the possibility of getting the products patent protected in some way (seems also rather impossible, and even if possible, it won’t last forever) or build a strong brand around the products in order to keep rivals at arm’s length.
Peak of Inflated Expectations?
You probably realized that I left out the third and last step in my description above, which includes aspects like new era thinking and the fear of missing out. We definitely see first signs of new era thinking as some people are arguing that we see the revolution of an entire market and some experts already see the end of the meat market as we know it. Whether this will happen or not, it's showing characteristics of new era thinking and this is almost always dangerous as it leads to hypes and extreme bubbles.
The extreme stock price increase we witnessed for example on Friday (and again on Monday) but also during the last few weeks is suggesting that the fear of missing out already is present and people simply invest because they are afraid never to get a similar buying chance again. “The stories in the press capture the excitement around the innovation and reinforce the need to become a part of it or be left behind.” (Mastering the Hype Cycle, p. 8). And when you read about many others that apparently invested in Beyond Meat (whether it is true or not) and write about the profits they made, you might feel like the biggest idiot walking the earth, and this increases the fear of missing out.
I'm not sure if we reached the peak of inflated expectations yet, and although the valuation already is ridiculous, I think it's possible that the hype will go on a little longer (it could be a few weeks or a few months – I don’t know). Although the mass media already picked up the story, there's a lot more room to run. When comparing the search volume for Beyond Meat (red line) with the search volume for Bitcoin (blue line) at the peak of the hype in December 2017 we see a huge difference and see also how much more dynamic a hype could get.
(Source: Google Trends)
Beyond Meat is definitely no stock to buy right now as investors can only loose right now (traders might profit, but that’s playing with fire). I'm also not suggesting to short the stock because I think it's possible the hype will go on for several weeks or months. And as a saying goes: The market can stay irrational much longer than you can stay solvent.
My advice will be the same as it was for Bitcoin at the end of January 2018. In the article I wrote as conclusion:
Stay on the sidelines, watch and learn how bubbles are created and how bubbles burst. Blockchain may be what the Internet was in the dotcom bubble - the underlying technological revolution that will survive and alter our lives and maybe some of the cryptocurrencies may survive as well. But you can be sure that more than 99% of existing cryptocurrencies will be worth nothing - and the chances of Bitcoin, Ripple, Ethereum or Litecoin being among them are pretty high.
Pretty much the same will be true for Beyond Meat. Maybe meat from plant-based ingredients is a revolution and will change the way we eat forever. But predicting if that will happen is difficult and predicting which companies will come out on top is even more difficult. And right now, you will probably lose even if Beyond Meat will be among the major players in the market as a market cap of almost $10 billion (at the time of writing!) won’t be justified within the next decade (or even longer).
Postscriptum: The article was finished on Sunday, but I didn't have enough time to proofread so I decided to submit the article on Monday. But only a few hours was enough for "market cap" and "percentage gain since IPO" to be completely wrong again and made it necessary to change the article. This might be the strongest evidence for a hype.
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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.