Is Beyond Meat Stock A Buying Opportunity As It Nears All-Time Lows?

Summary

• Beyond Meat is trading near its all-time lows.
• The stock’s journey since going public in 2019 has been tumultuous.
• BYND’s fundamentals are poor, with weak financials, substantial net insider selling, and a high short interest.
• The outlook is improving, but the challenges are huge.
• Beyond Meat remains speculative; bankruptcy, dilution, or further valuation compression are all possibilities.

Joe Raedle

Introduction

Beyond Meat, Inc. (NASDAQ:BYND) is a plant-based meat company that manufactures and markets meat-free alternatives to beef, pork, and poultry. The organization sells its products in countries around the world and has well-established relationships with restaurants and grocers. Though the business has historically been a leader in its field, the stock has been hammered and is trading near all-time lows.

Why Has BYND Stock Dropped And How Did Owners Get Here?

In 2019, the venture IPOed to much fanfare. It was initially listed at $25.00, but started trading at $46.00 and hit highs over $230.00 in mid-2019. At the time, analysts thought plant-based meat products like burgers, sausages, and other items designed to look and taste like meat were going to revolutionize the way people eat, disrupt the food industry, and cut the environmental impacts associated with meat-heavy diets. Investors were thrilled at the thought of owning a piece of this future and did not care about valuations, net losses, competition, capex requirements, or lofty growth expectations.

Since mid-2019, the stock has cratered, and is now below the IPO price of $25.00. The reason for this drop is simple: investors overpaid. This is because even the most promising company with the best industry prospects can be too expensive. As the chart below demonstrates, investors in mid-2019 were typically paying over 50 times sales, and were briefly paying more than 100 times sales.

TIKR - BYND P/S chart June 2019 to May 2023 (TIKR)

Even for much of 2020 and 2021, investors were paying between 15- and 20-times sales. These are incredibly high multiples. Moreover, the price-to-book ratio did not look much better, and there was no net income, EBITDA, or cash flow. This meant that other valuation metrics like price-to-earnings, price-to-cashflows, and EV/EBITDA were not useful. Instead of considering the lofty valuations and lack of profitability, investors hyped themselves into a frenzy on the hope it would grow wildly. Instead, BYND has proven to be growth at an unreasonable price, and shareholders have been burned.

Current Financials, Investor Sentiment, And Valuations:

Today, the hype is gone. Beyond Meat is in a difficult position, and the stock is speculative. Instead of envisioning the ways it will change the world, analysts are now focused on the corporation's operational and financial challenges.

The scale of these problems is hard to understate. Instead of growing, the top line is contracting, and volumes are down. The company has regularly lost money since it was listed and there is no evidence that it has pricing power with consumers. In 2022, the annual loss was a whopping $366.14 million, and even the latest quarter saw a loss of $59.04 million.

Organizations that consistently lose large amounts of money often dilute shareholders, borrow, or do both. In the case of BYND, the firm has added a huge amount of leverage. In the latest quarter, the total debt stood at $1,183.00 million, of which $1,134.60 million was long-term debt. By contrast, cash was $258.60 million and total assets stood at $986.60 million. This means the name has a substantial net debt position and has negative equity.

Finding a way to pay off this debt (and interest) will be a challenge. To address the debt load, management may be forced to issue shares and dilute existing owners. Indeed, in early May, an "at the market" equity offering was announced for up to $200.00 million in common stock, which means the executive team can now raise equity financing fairly quickly.

Falling revenues, large losses, and the state of the balance sheet help explain why the ticker is trading at all-time lows. It may also explain why the short interest stands at around a third of shares according to Seeking Alpha. Not only is the market bearish, but insiders are too. According to INK Research (Insider News & Knowledge Research), directors and executives have sold net $2.60 million in stock over the past year. The pace of selling has slowed, and certain insiders (including the CEO) still own a lot, but there is no question this is bearish.

INK Research - BYND insider transaction history - May 2022 to May 2023 (INK Research)

The terms dumb money and smart money get thrown around a lot, and definitions for each differ between investors. Nevertheless, I can make a strong argument that insiders represent smart money, as they are the ones with the clearest picture of their company's prospects. Therefore, it is not encouraging to see insiders selling in this way. If BYND's future looked good, it would be reasonable to assume those in the know would be buying instead.

Finally, while the valuations have dropped versus 2019 and 2020, they are still lofty. The price-to-book ratio is gone now that BYND has negative equity, price-to-earnings and cash flow metrics are non-existent as well, and the price-to-sales ratio stands at 1.7. This is a high price to pay for an enterprise in this state.

Management's Outlook:

The outlook for 2023 calls for sales to contract between 1% and 10%, but management thinks operating cash flows will be positive in the second half of the year. This would be a welcomed change and a step in the right direction. To get there, though, BYND will have to contend with competition, supply chain disruptions, and changes in labour availability. The corporation will also have to continue restructuring certain contracts related to the Beyond Meat Jerky product line. This forecast is positive, but it could fail to transpire - and even if it does, the company will be in a tough spot.

Investors Pain For Society's Gain?

The final point to highlight here is one from Warren Buffett and Charlie Munger. In the past, they have argued that revolutionary industries with excellent prospects may make wonderful contributions to society, but that social contributions do not automatically translate into good investor returns. In fact, they argue, owners may be left holding the bag.

In The Snowball, Buffett references automobile stocks listed in the 1910s and 1920s to drive home this point. During that era, there were thousands of automobile makers in the United States, many of which were listed, but most of them went bust early on. Those that did survive the first decade competed against each other to the point where returns on capital were low, and eventually there were only three publicly-traded American automakers left. Buffett and Munger go on to note how similar experiences befell railroads after the Civil War, airlines in the 1950s, semiconductor manufacturers from the 1970s, and internet start-ups in the 1990s.

Bears and bulls could argue over the company's brand recognition, first mover advantage, and how plant-based meats could change the way we eat, but regardless, Buffett's warning should be heeded as competition whittles away potential benefits to owners.

Conclusion: Is Beyond Meat Stock A Buying Opportunity?

Beyond Meat is trading near its all-time lows. Despite an improving outlook, high brand recognition, and its first mover advantage in a burgeoning industry, it appears risky and speculative. Investors interested in the name must contend with declining revenues, significant net losses, and a debt-heavy balance sheet with negative equity. They must also be aware of the millions in net insider selling over the past year, and the sizable short interest. Plant-based meats may revolutionize the way we eat, but BYND shareholders may not benefit in the process. Bankruptcy, dilution, and further valuation compression are all possibilities. I do not currently consider it a good contrary buying opportunity and do not own a position.

Disclaimer

The opinions expressed - imperfect and often subject to change - are not intended nor should be taken as advice or guidance. The information enclosed in this article is deemed to be accurate and reliable, but is not guaranteed by the author.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.