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Beyond Meat's (NASDAQ:BYND) long-term bull case has been in the works for a long time even though its bears have acted quite oblivious to it. Plant-based diets are growing exponentially and the company has positioned itself to ride this revolution that once only stood at the far margins of society. Purely plant-based diets are now on an unencumbered upward growth with recent research suggesting that they could entirely replace their traditional alternatives within the century if they continue their current rate of growth.
This new reality has come from a convergence of a number of structural trends that mainly centered around the environment. The most pertinent of these is climate change. Emissions from plant-based foods are 10 to 50 times smaller than animal products. Meat consumption also constitutes around 14.5% of global greenhouse gas emissions. Essentially, if the world is to meet its target of limiting global warming to “well below” 2C, radical changes in the global diet are required. This has driven demand for plant-based food from a new class of more environmentally-conscious consumers.
These are predominantly in the Gen Z and Millennial age groups. Indeed, almost 9 in 10 of Gen Z are worried about the environment, 41% of whom feel that climate change is the single most important issue facing the planet. A further 35% Of Generation Z want to be meat-free by 2021 with some citing animal welfare as a pervasive reason. This has built the rigid foundations for Beyond Meat's historical growth and future momentum.
Where Is Beyond Meat On Its S-Curve?
Beyond Meat fell by 12% on Friday after releasing guidance for its upcoming earnings. The company now expects revenue for its fiscal 2021 third quarter of $106 million, down from prior guidance of not less than $120 million and consensus estimates of $133 million. This will mean a sequential decline of 29%, albeit a year-over-year increase of 12.3%. Beyond Meat's management blamed the deceleration on broader ongoing macro factors including the effects of the Delta variant on retail demand as well as a decrease in retail orders from a Canadian distributor. This coincided with the reopening of restaurants and labour-shortage driven delays in distribution expansion and shelf resets.
The company does potentially face a large order from McDonald's (MCD) who plans to run a pilot using Beyond Meat for its McPlant burger in different parts of the United States. Beyond Meat could be set to realize annual incremental revenues of at least $200 million if McDonald's launches a Beyond McPlant nationally across its more than 13,000 locations. Further, a potential global launch would be transformational to the company's revenue trajectory. BTIG analysts expect Beyond Meat to use its more than $1 billion in cash and equivalents to market the McPlant and ensure a healthy trial.
More And More People Are Avoiding Eating Meat
The consumer shift to plant-based eating is real and picking up pace. The vegan food market alone is expected to reach $35.5 billion by 2027, an increase of 219% in eight years.
Vegan Market Growth From 2019 to 2027 (Source)
This has now undoubtedly progressed into a structural long-term trend on par with the decarbonisation of transportation and zero-carbon energy. Fundamentally, it represents a new class of ESG investment. Beyond Meat's bears would be somewhat right to state that its current valuation got too far ahead of fundamentals. At its current market capitalization of $6.06 billion, trailing 12-months price to sales multiple stood at 13.26x. This is a material premium to its sector median of 1.45x. Hence, even after its double-digit fall, the spectre of a further retrenchment of its common shares looms over its current shareholders if hypergrowth baked into its stock price fails to come to fruition.
But the future ahead is clear. The growth in plant-based diets is not a fickle short term trend. It is a permanent shift in consumer eating that will undoubtedly progress to become have a dominant stay in the future diet of most people in the developed world. The signs are there for those who look; from the growing popularity of veganuary to the rise of purely plant-based food companies going public. This revolution will be steady and Beyond Meat has positioned itself to ride it in the years ahead. Hence, its current valuation needs to be set against this context. As more restaurants stock its products and more people incorporate plant-based food into their diets, Beyond Meat should see its financial benefit. Stronger revenue growth, lower marketing spend, and an enhanced profitability profile are all in play on the back of this. While I hold no position in the stock, it is one to watch for those looking at an entry in the future of food if the stock price continues to decline.
