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Beyond Meat: Still A Risky Price Despite Innovation

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About: Beyond Meat, Inc. (BYND), Includes: AAPL
by: The Prospector
The Prospector
Long only, Growth
Summary

Beyond Meat is the latest iteration in a long line of companies selling plant-based protein products.

There is nothing innovative about the concept of plant-based alternatives to meat.

However, Beyond Meat's continual focus on improving product quality may give it an advantage over the long-term.

The company is also making strides to cut ingredient costs in its mission to create meat alternatives that cost less than meat.

65% off its nose-bleed highs, company valuation still a question and buying here still comes with risk.

Thesis

Beyond Meat (BYND) may have the right mindset as a company to make this meatless meat thing work. As I stated in my first article about Beyond Meat, competition will only intensify in the coming years and the market may soon be drowning in meat alternatives that look and taste similar to what Beyond Meat is selling today, notably its Beyond Burger.

That said, the company's philosophy of continually improving product quality--it will soon have a new and improved Beyond Burger--is the same mindset that Steve Jobs had when he ran Apple (AAPL). Jobs was a restless perfectionist who was always pushing his people to create new products that were better than the ones they had already built. By continually disrupting itself, Apple helped ensure that a competitor didn't do it first.

This was my key takeaway from the Q3-19 Beyond Meat call. Though competition will intensify and the valuation of the company remains a question, I believe Beyond Meat has the right mindset to have a fighting chance of being a permanent, dominant fixture in its market. However, there is no guarantee this will happen and an investment at these levels is still a risky bet.

Source

The Innovator's Dilemma

If you want to start a company, it helps to understand the weaknesses of your competition. Jeff Bezos has famously said, "Your margin is my opportunity."

Large, established companies can get lazy. Large companies are typically not synonymous with perpetual innovation. The finance people take over. Product quality and innovation take a back seat to cost efficiencies and margin improvement. The company milks the cash cow. Leadership gets comfortable. The numbers look great in the short-term. Everything is perfect. But the comfort leads to complacency. And the complacency ultimately creates an opportunity for potential competitors.

Source

The large company's decreased emphasis on innovation--creatively destroying its own products with better products--results in an upstart entering the market with a better product that ultimately unseats the large incumbent.

The large incumbent dies. Only to be replaced by the upstart that itself becomes the large incumbent before it eventually succumbs to the same fate of the large company it replaced.

Apple's Steve Jobs was obsessed with creating a company whose culture never succumbed to complacency. His goal was to build a company that creatively destroyed its own products before the competition did.

Source

Based on what I heard on the Q3 Beyond Meat earnings call, CEO Ethan Brown has the same mindset.

There are similarities between technology and meatless meat. They are constantly evolving and there is always room for improvement. But it is also difficult to develop and maintain a sustainable competitive advantage in either industry. That's why the adoption of creative destruction of your own products is vital to having a fighting chance of winning over the long-term. It's better to improve upon your own products before somebody else does.

This mindset may be the edge that gives Beyond Meat a long-term advantage in a market--meatless meat--that will become intensely competitive in coming years.

Source

Prior to the current phenomenon surrounding Beyond Meat burgers and Impossible burgers, there were plenty of meatless meat burger options. It's just that none of them really stood out in a crowded field and none of them closely resembled actual hamburger meat in texture or taste. And none of them really aspired to elevate the product level...until now.

A variety of food product companies--large incumbents--are now introducing meatless meat products that attempt to compete with Beyond Meat's products. At the moment, Beyond Meat is riding a dream wave of free publicity and it seems the company is signing a new distribution deal with a leading restaurant chain every week.

Source

But that tide could quickly shift if better products enter the market. It sounds like Beyond Meat has every intention of preventing the deterioration of its position in the market. Execution will be key. And it remains to be seen how the market evolves.

Valuation

Beyond Meat's cocaine-high stock price of $240 is thankfully in the rearview mirror. But at $80, we're still trading at insane valuation premium. The stock price still has a lot of expectations baked into it. The company is growing revenue at a torrid triple-digit rate, but it is unclear how long this growth rate can last.

A lot of the company's sales momentum is being helped by the media buzz. As the market floods with new, comparable options, I'm hesitant to believe that brand loyalty will be enough to sustain the company's growth trajectory. Perpetual innovation will be key and I believe Beyond Meat has a chance of building a sustainable competitive advantage in the market, but there's a good chance its commitment to innovation won't be enough of a differentiator to sustain ambitious revenue growth expectations. Because of this, I'm umcomfortable paying 16x forward sales for the company.

Conclusion

Beyond Meat's devotion to creative destruction may make it a long-term winner in this space, but there is no harm in sitting on the sidelines and waiting to see how it plays out over the next several quarters. You can't lose money in a hyped up growth stock post-IPO if you don't invest in it.

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.