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Warren Buffett’s right
You can be in the most marvellous business sector, one going like gangbusters, but if you’ve not got a moat around your business and its profits, then you’re going to have a very, very, hard time of it in the medium- to long-term future. Given that Buffett does invest for that long term then, he looks for the moat, first and above all. That moat can be near anything. A brand name, network effects, patent monopoly, distribution network, whatever. But something that isn’t easy to replicate – and probably isn’t worth trying to replicate either. Therefore the person who has it gets to enjoy those protected profits over the longer term.
Beyond Meat (NASDAQ:BYND)
Back two years, November 2020, I said that BYND didn’t have that moat. It was therefore overvalued – because it was valued as if it did – and that investors should sell.
Now, anyone can have a lucky shot at a recommendation but BYND has fallen 89.5% since then. True, there were short periods in early 2021 when a profit could have been made buying when I said sell, but $127.15 down to today’s $13.15, well, call it luck if you like. Myself I stick with that initial analysis.
Or, as we could put it, a growth stock that seems to have run out of growth. Which, for something trading on 20 times revenues (no, not earnings, revenues), probably isn’t a good support for the stock price.
Back then Beyond Meat was priced as a go-go growth stock. As soon as the growth starts to fade, then so does the stock price. Because the multiple assigned to that future expected growth disappears, obviously enough. That was already happening, falling growth rates, back then.
Now it’s worse; we’ve got cuts in already forecast and expected sales – not just cuts in growth rates but cuts in expected revenues. That pretty much kills that growth stock multiple of course.
But, but, Taco Bell, Panda!
We’ve still got Taco Bell trying out Beyond Meat products also Panda Express. There’re more and more grocery stores carrying stuff – even if more than we’d like to see ends up in the discount bin. Other restaurant chains have picked it up in the two years since I last wrote on the company.
So, umm, why’s it not a success? Well, this is, I insist, the outcome of my original contention. There’s nothing to protect Beyond Meat’s position.
To explain again
I agree entirely that the idea of non-meat that looks and perhaps tastes like meat is a product whose time has come. Whether it’s about climate change, being animal-friendly or just some wokeist fashion doesn’t matter in the slightest. More people are interested in consuming such stuff, so there’s a business there in making what people want to buy. Be capitalist about this – doesn’t matter what the people want, there should be money to be made from supplying it.
But that then runs into that basic problem of markets and capitalism. As Adam Smith pointed out, capitalists are both lazy and greedy. If someone finds a new way of making more than the usual amount of profit, then others will attempt to capture some of that for themselves. They’ll copy that is.
This is where Buffett’s moat comes in. Only if there is a moat can the original – or any other – producer retain that excess profit. Because if there isn’t something protecting against that competition, then it will arrive and it will compete away that profit.
In this particular market, it’s all too new for there to be an established brand that beats that competition. Beyond (like anyone else, Incredible or whomever) isn’t established enough to be like Coke (KO) beating off the tens of thousands of other fizzy sodas out there. OK, so Beyond is getting the food chains to try the stuff out. But a new supplier and a big fast food chain – who is going to make the margin there?
Further, the thing that’s being done is to turn pea and or lentil protein into another way of eating pea and or lentil protein. Those raw materials are not exactly expensive. Once it’s known how to make it vaguely meat like, then others will copy. The economy is hardly short of food processors who are willing to own-brand for the supermarkets now, is it? And if the original brand – being too new – isn’t strong enough to differentiate, then those excess profits simply disappear.
The idea that the process is impossible to copy is, I’m afraid, nonsense.
So, without the moat, every success simply brings in more competitors. Meaning that it’s entirely possible for the sector to expand – as it has been doing – without profits at any one producer expanding – as has been happening.
Now, in those larger terms of the economy as a whole, this is exactly what we want to be happening. Invention happens, some lucky few capitalists make out like bandits and it’s consumers who benefit mightily over the medium to longer term. As investors, of course we’re not so happy with this. We’d like to be in those people who don’t get competed down to normal profits. Moats, d’ye see?
Where next?
So, I claim I was right that two years (OK, 23 months) ago. But stock markets are forward looking. What matters to a stock price is what happens next, not what has happened. At which point my answer is – dunno.
Looking at the results we might say this is an entire disaster – net loss of $97 million on revenues of $147 million? Sheesh. But I would claim that an awful lot of that is that the company is still thinking about being a growth business. The overheads, research, marketing expenses, are still being run as if this was a land race play, to grab ever more of a swiftly expanding market.
Hey, maybe it is, but I would argue that that lack of a moat makes that a non-viable strategy.
However, there’s a perfectly reasonable normal profit business in there. On that sort of revenue, it’s entirely possible to sell pea protein (or whatever the vegetable ingredient is) at a profit. After all, someone selling $147 million a quarter of peas would – could – be making a profit. And there are people selling beanburgers in those sorts of volumes who do just fine. They do have their costs rightsized for their revenues though – and they are making normal, non-moat protected, profits too.
Which is why I don’t know
I can imagine that killing the costs associated with being a premium foodstuff pioneer and simply being a food provider would lead to an entirely reasonable business. One that just made boring levels of profit on throughput. I can also imagine that the current attempt to build this new brand in this new market continues. Heck, I can even imagine – although at a very low probability – that the second plan might work. Maybe a moat we’ve not thought of turns up.
So I don’t actually know. But two years ago I did.
Why I’m wrong
Sure, it could be that Beyond Meat becomes the go-to brand for non-meat. I think it’s very unlikely because I can’t see where that moat is. But then that I can’t see something isn’t proof of anything, it just makes it my view. So, if Beyond Meat is able to charge a premium for its products, then I’m wrong. A sustainable premium that is. A premium that pays for all of the extra expenses they’re incurring over and above simply being a food products supplier.
My view
The real point here is that two years back I was confident enough in my view to make that sell recommendation. I rarely make either buy or sell recommendations and this was one of them. The reason was that it was, to me, obvious that there was nothing out there protecting Beyond Meat’s margins and thus potential profits. As has turned out to be true.
90% of stock price fall later and now I don’t know. I can imagine the stock going either way from here. The very vague idea that the original plan might succeed. Then to me more likely thought that they continue to try it and it continues to fail. Or, that third idea that they transform into being just a boring plant into food business – like, as above, beanburgers, at beanburger costs and margins. But beanburger makers do make profits, even if very boring ones.
So, given that I no longer know my advice is to be elsewhere. Or, listen to someone else with stronger views on Beyond Meat stock.
The investor view
This might not be terribly helpful but I have no view on the future of Beyond Meat stock. I did have one, which I shared with you. So, now that I don’t I guess I’d better tell you that too.
After the 90% or so stock price change I don’t know what comes next. Well, good luck.
As to what could be done by those who think they do know. There’s the possibility that BYND continues its current path, they luck out into that moated success or they rightsize the business.
As I say, I just don’t know. I’d therefore – if I had a stake here – get out and redeploy somewhere else. Strangely, the gross over-reaction and liquidity problems in gilts – British government bonds – make the long-term issues of those very attractive at the moment. That’s a short-term trade but one worth looking at.
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