As of August 12, Beyond Meat (BYND) stock has fallen 28% from its high of $234.9 on July 26. Earlier, the plant-based meat producer’s stock rose to more than nine times its IPO price in less than three months. In a recent interview, Beyond Meat’s CEO Ethan Brown said that the company’s brand has morphed into a movement in a short span of time. A closer look behind the company’s formation and philosophy may help in understanding what may lie ahead.
Plant-based meat is environment-friendly and healthy
In an earlier interview, Brown discussed the positive impacts of plant-based food on the environment. According to a study done by the company along with the University of Michigan, a beyond meat burger produces 90% fewer greenhouse gas emissions compared to a beef burger. Further, the company’s burger uses 93% less land than a traditional beef burger. According to Beyond Meat, as much as 51% of global greenhouse emissions are driven by livestock rearing and processing.
In addition to environmental impacts, Brown believes that livestock-based meat is not healthy and increases the risk of heart disease, diabetes, and cancer. According to the IARC (International Agency for Research on Cancer), eating processed and red meat may increase the risk of cancer. There are various other ways that meat may be harmful to a person’s health.
Will people change eating habits for animal welfare?
Another staggering statistic is that roughly 66 billion land animals are slaughtered for food every year. Brown believes that the difference between animals in the agricultural system—that are raised to be slaughtered—and the ones we keep as pets is cultural and not biological. That means slaughtering them for food may not really be a good idea.
While it’s great to know that plant-based food is probably healthier, environment-friendly, and animal-friendly, it is difficult to switch to veggies from something that you’ve loved to eat all your life. Brown said, “You don’t build a business telling people not to eat what they love. You build a business helping people to eat what they love, and more of it.” And the company is working to give customers the same taste but making it from plant-based material.
Revenues beat estimates despite net losses
Beyond Meat reported a strong second-quarter performance. The company’s revenues beat estimates, though it reported higher net losses than analysts’ estimates. However, BYND announced a secondary offering of approximately 3.2 million stocks, resulting in a steep fall in its stock price. The secondary offering comes too soon after the company’s IPO. Moreover, 3 million of the 3.2 million shares in the secondary offering came from certain selling stockholders of Beyond Meat.
Beyond Meat didn’t receive any proceeds from selling stockholders’ offering. It only received proceeds from 250,000 shares that it offered. Obviously, it concerned investors and the stock tanked close to the offering price of $160 in a few sessions.
Sky-high valuation justified or not?
Analysts have been raising concerns about Beyond Meat’s expensive valuation for quite some time. In June, when the stock was trading at around its current levels, J.P. Morgan (JPM) downgraded it on valuation concerns. Interestingly, the stock continued to surge all the way past $230, before falling again close to $160.
Because Beyond Meat isn’t profitable yet and the company is growing at a high rate, which will likely not be the case in the long term, the best metric to use for valuation is the P/S (price-to-sales) ratio. Based on a 2019 guidance of revenues of $240 million, the stock is trading at a P/S ratio of around 43x. For comparison, McDonald’s (MCD) is trading at a P/S ratio of 8x and Starbucks (SBUX) at approximately 5x. Now that might look like a lofty valuation for BYND. But that’s mainly because it’s a rapidly growing company. Let’s take a closer look at some numbers here.
In the last six months, ending on June 29, Beyond Meat’s net revenues rose 256.5%. Assuming the company maintains this growth rate in the next year, its revenues will rise to around $850 million. At current market price, the P/S drops to around 12x. Now, of course, things aren’t as simple as they look in the calculations above. But, the point is, the seemingly sky-high valuation may not be completely unjustified.
Competition could challenge growth revenues
Revenue growth may not be that difficult to achieve, considering Beyond Meat is pulling all the right levers to generate brand awareness and doing a good job in product distribution as well. However, improving the bottom line may be a challenge. Again, the company may face stiff competition from other newcomers, such as Impossible Foods, as well as established players who are increasing their offerings in the plant-based food segment. In addition, if the sales number is achieved, it will be at the end of next year. So, it will be roughly two years before the sales number justifies the current valuation. So, the current stock price is not justified.
Investors in Beyond Meat
At last, the above table shows the top ten investors in Beyond Meat and their latest position changes. As per Beyond Meat’s recent secondary offering filing, Kleiner Perkins Caufield & Byers (KPCB) were expected to hold approximately 11.5% of the company’s shares after the offering. The venture capital firm was among the selling stockholders in the secondary offering. Similarly, Obvious Ventures was expected to hold approximately 6.7% after the offering.
As for analysts’ recommendations, all of the seven Reuters-surveyed analysts covering Beyond Meat have given a “hold” rating for the stock. The mean price target for BYND is approximately $165.