Beyond Meat Stock Is Likely In Trouble (NASDAQ:BYND)

Meatless Burger Maker Beyond Meat"s Stock Price Continues It"s Skyrocketing Rise Since Its IPO In May

Drew Angerer/Getty Images News

Company Description:

Beyond Meat (NASDAQ:BYND) is a market-leading meat-alternative company, primarily producing and selling plant-based foods, among other vegan goods.

Beyond Meat rose to prominence in recent years for many reasons. Those include society wrestling with the morals of eating animal-based foods. Also, with the world’s population growing as it is, there is a real chance that it will no longer be possible to feed the world’s population without alternatives. Beyond Meat is attempting to be the leading business encouraging people to move across to a plant-based diet.

Beyond Meat (BM) has not had a good year however, the stock is down 85% since June 2021.

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Data by YCharts

Spotting a new market opportunity does not guarantee success, neither does becoming a market leader (as crazy as that sounds). In the case of BM, they seem to be a victim of their own success. The aggressive share price growth placed pressure on the business to achieve what could be argued as impossible, toppling the meat market.

3 years after its IPO, the business has yet to show net income profitability (Source: TIKR Terminal) and when we look at the P&L, this is not even the worst thing we see. Further, these losses need to be funded and it is currently the balance sheet which is doing that. Liquidity risk is heightened in the coming period, as BM’s capacity for debt reaches an all-time low. Furthermore, we do not believe there is enough evidence to support management’s stated current trajectory. Management is of the belief that meat-alternatives will take a material share of purchases from meat which we cannot currently see. Finally, if this was not enough, we think the valuation is still absurd. An 85% fall does not mean a company’s valuation stops being overvalued and that is the case here.

For these reasons, we believe Beyond Meat is a sell. We will explore these points in further detail and assess if there are any counterarguments to give investors some hope.

Market Analysis:

The size of the global meat industry is estimated to be $1.3TN$1.4TN, with the plant-based food market being only $35.6BN. Meat is expected to grow at 3.1%, compared to 18% with plant-based food. It is certainly clear that plant-based food is on the rise, 18% is astounding growth for a market. There are multiple reasons for this, naturally, as we are talking about a market that involves every human on earth. Research has shown that most people choose plant-based for 3 reasons:

  • They do not agree with eating meat
  • They like that it is environmentally sustainable
  • They like that it is a healthier option

The reason this is becoming more mainstream is the media. People are more aware than ever of the points above and businesses like BM were created as a response, thus creating supply and further demand through marketing.

In the case of BM, they have ridden the hype and growth through aggressive marketing, with revenue growing from $16M to $465M in 5 years. Behind the marketing has been genuine R&D spend to ensure their product is healthy and tasty. We see no reason why BM cannot achieve at least the market growth going forward.

Further research by Meatless Farm and Brakes has found that 32% of people in the UK would eat plant-based food as they “wish to try something new and different”. Only 14% of people currently follow a meat-free diet, however. This suggests that those trying the option fall between the boundaries of not liking it or are not willing to give up meat completely. This is the issue for this market, the idea that meat will be given up by a large percentage of people is unrealistic, at least in the next few decades. This supports the growth rates in both markets as meat will continue to grow at a rate above population growth (as people are priced into regularly eating meat) but the number of people dabbling in plant-based meat will increase further. Should plant-based continue at 18% growth, which is unlikely, it will still take 27 years for it to reach the size of the meat market.

The growth in the market is thus extremely attractive and so naturally has brought a lot of interest to BM over the last few years. The reality, however, is that people are trying plant-based foods or occasionally buying it, it is not being adopted on a wide scale. For this reason, we believe BM must be looked at as one of the many options for the minority, rather than a business who can target everyone.

The future of the market:

Although we do not believe plant-based food will replace the meat market, we are seeing evidence to suggest it will mimic its characteristics.

Meat, for the masses, is generic. Chicken is chicken, beef is beef. In the plant-based market, brands initially had a lot of importance as there were not many options. We are seeing that slowly change.

Using the UK’s largest Supermarket Tesco (OTCQX:TSCDF), as an example, we now see a host of options for meat-free foods.

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Tesco’s Frozen Vegan Options (Tesco Website)

Consumers have a wide variety of options now which is reducing the value of any one brand. If consumers can now shop around, especially if there are cheaper options, they will in order to find their favorite.

When we look at the price difference between the supermarket’s own brand and BM, it is stark.

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Price difference between Tesco’s burger and BM’s (Tesco Website)

Therefore, we do not believe this to be a market where first-movers advantage will have a material impact. BM will be squeezed on price by the own-brands and face further competition from the host of new businesses in this space. This is also in the medium term only, we could see further market disruption to the extent that brands mean almost nothing and price is the most important thing over time.

What does this mean for BM, in the short-term it will likely mean greater competition alongside compressed margins. Its taste and ‘uniqueness’ will be put to the test, with more options than ever, BM will have to stand out.

The Product:

Beyond Meat has invested heavily in the science behind their product. The reason for this is that they want it to be healthy while also tasting as close to meat as possible (or being as tasty as possible where not a meat-alternative). The reason for this is clear, people do not care what name is on the label, they are buying the taste. Just like in the meat industry. Apart from the wealthy few, people do not enter a supermarket and request a specific farm’s meat, they just want good quality. Impossible Meat is one of Beyond’s biggest competitors, we have collated some reviews below from the top 4 links on google.

  • “I found that the Impossible patty tasted a lot more similar to beef than the Beyond patty.”
  • “Our team members all agreed that Impossible had more of a convincing beef flavor, mind you, we have all been vegans for a minimum of 1 year.”
  • “Some reviewers and consumers complain about the (Beyond Meat) patty’s earthy taste.”
  • “The Impossible burger, which is vegan, outperformed every other contender in every category and in both rounds; the competition wasn’t even close”.

Having read several additional reviews, the consensus was unanimous. Impossible was the closest meat tasting product but also the best tasting in general. We understand that not everyone is looking for a meat tasting food but for many people contemplating moving across from meat, this makes the transition easier.

Most complimented Beyond Meat’s offering, especially when it comes to the healthiness, but had issues with the flavor. This is a serious issue as people rarely eat the most healthy option possible but rather find a trade off they are happy with. With most plant-based foods being overall more healthy, BM is not unique. Finally, there is not a material difference in the price of the options.

Impossible and BM have signed partnerships with food businesses to offer a vegan option. Most notably, Impossible has partnered with Burger King and Beyond Meat with McDonald’s (MCD).

It is hard to be bullish about a company when its lead offering is inferior to its competitor. As we mentioned, our belief is that taste is the most important and BM is clearly not at Impossible’s level.

Financials:

Beyond Meat’s financials are extremely messy.

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Beyond Meat’s 2020, 2021 and LTM results (TIKR Terminal)

Margins are contracting and contracting quickly. One of the reasons for this is likely the points identified above, competition is increasing and the supermarkets now stock their own-brand products which are significantly cheaper.

The biggest issue however is the route to profitability. S&A expenses are an eye-watering 53% of revenue in the LTM and again is increasing. This suggests BM is struggling to maintain and increase its customer base. This is a serious issue as the company is growing and so one would expect its brand value to also. Based on the current trend, BM will begin to lose more and more money in the next few years. We have yet to see anything to suggest this trend will change.

Losses need to be funded and the balance sheet is bloated with funding previous losses. Convertible long-term debt sits at $1.1BN, with a cash balance of $550M. With -$440M in FCF last year, this cash balance will likely be gone within 2 years. The good news is that the debt is redeemable at $206 p/s and has a coupon of 0% but that does not take away from the fact further funding will be required. For this reason, we genuinely believe BM has future liquidity concerns and may need to dilute shareholders or restructure the current operations.

Finally, growth is slowing. Although this may be good for reducing losses, it is not good for the long-term outlook of the business. Analysts believe growth will sit around 20%-25%, per Tikr Terminal, into 2024 but LTM has dipped below 20%.

Valuation:

With negative EBITDA, uncertainty and no evidence of future cash flows, valuing BM is not an easy task. Therefore, I will revert to Seeking Alpha.

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Seeking Alpha’s factor grading (Seeking Alpha)

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Seeking Alpha quant rating (Seeking Alpha)

The picture is clear, based on the current metrics, assigning any kind of valuation premium is not possible. BM is trading at 3.5x NTM revenue which we believe is too high.

Closing Thoughts:

When we look at Beyond Meat, it’s a company acting in the greater good of humanity. Whether you enjoy meat or not, the science is clear. Our demand for meat-based food is unsustainable and the industry as a whole is not good for the environment.

This does not make a good investment, however. What we also see is headwinds after headwinds. The company has found itself in a very problematic position. Its financial model does not work, this has broken the balance sheet and the industry is moving in a way which is not beneficial for BM.

With a short interest of over 40%, Wall St. appears to see this clearly. Based on the facts we have identified, we cannot see this being a good investment at its current price. We, therefore, assign a strong sell rating.

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