Beyond Meat Stock Easily Could Rally Above $100

Advertisement

Wall Street fell in in love with plant-based meat giant Beyond Meat (NASDAQ:BYND) the day the company went public. The adoration hasn’t stopped since. The Beyond Meat IPO was a smashing success, with Beyond Meat stock staging the biggest opening day rally since the 2008 Financial Crisis.

Beyond Meat has stayed in rally mode ever since. Today, shares are up 290% from their IPO price, and the IPO was about a month ago. In other words, Beyond Meat has nearly quadrupled in about a month. That’s wild. Naturally, one has to ask: is this a bubble?

I don’t think so. Sure, BYND looks crazy expensive if look at the company’s present financial profile. But, that’s not what investing in a growth stock is all about. Investing in a growth stock is about looking at the market tomorrow, and seeing how big the company (and stock) could be.

When you do that with Beyond Meat, it becomes crystal clear that this company is on track to be very, very big one day. Indeed, if you do math on this company, the long term growth fundamentals support Beyond Meat stock at prices above $100 by the end of 2019.

All in all, then, the Beyond Meat frenzy isn’t a bubble. It’s the start of something huge long term.

To be sure, that doesn’t mean investors should rush into the stock today. This stock has come very far, very fast and is overdue for a big pullback. But, when that big pullback does happen, that will be a golden opportunity to buy into a long term winner at a discount.

Big Tailwinds Support Big Growth

The secular growth narrative underlying Beyond Meat is pretty simple.

There is a huge shift in the consumer economy from animal-based diets to plant-based diets. Broadly, this is the result of a secular rise in consumer awareness regarding human health, animal welfare, and climate change, in conjunction with research that has found animal-based diets to have negative impacts on all three of those things.

In response, consumers of all sorts (animal lovers, health nuts, environmental activists, etc.) have started to migrate away from animal-based diets, and towards plant-based diets. That’s why total sales of plant-based foods in the U.S. rose 17% last year, and have been on a consistent double-digit growth trajectory for a long time.

Plant-based meats are the newest trend in this plant-based economy. Because plant-based meats are now good enough to the point where they are viable substitutes for animal-based meats, plant-based meat sales in the U.S. rose 23% year-over-year in 2018, led by greater distribution of these products in grocery stores and throughout the food-service industry.

This trend will continue. Over the next several years, consumers will increasingly shift towards plant-based meats, and the plant-based market (and its biggest players) will grow by leaps and bounds.

Beyond Meat Stock Is Supported Above $100

Plant-based meats still represent less than 1% of total meat sales in the U.S. (which measure around $270 billion). Globally, they represent less than 0.5% of global meat sales (which measure around $1.4 trillion).

Inevitably, those numbers will grow. By 2030, the U.S. meats market will march towards $300 billion, and the global meats market will march towards $1.6 trillion (or roughly $1.3 trillion ex U.S.)

Given that plant-based dairy already commands 13% share of dairy sales, it’s easy to see plant-based meat commanding 10% share both domestically and internationally. That implies a domestic plant-based market of $30 billion by 2030 and an international plant-based market of $130 billion.

Beyond Meat controlled about 12% of the U.S. plant-based meat market in 2018, up from 6% share in 2017. Further, if growth persists at a 200%-plus rate in 2019, the company will likely hit 15-20% share this year. On the international front, Beyond Meat has less than 1% share, but that share is similarly moving higher.

To be sure, market share gains will likely be capped in the long run by increased competition as bigger players pivot into the alternative meat section. But, Beyond Meat is an early player with first mover’s, branding, and partnership/distribution advantages. Those advantages should sustain a healthy market share at scale. I think 15% domestic share and 3% international share is very reasonable by 2030.

That would imply right around $8.4 billion in total revenue by 2030. Gross margins were 20% last year, and are zooming higher (25% projected in Q1). At scale, they could hit 30%. Meanwhile, meats giant Tyson Foods (NYSE:TSN) operates with just a 5% opex rate. To be sure, they are a $40 billion-plus revenue company. But, Tyson’s low opex rate does imply that Beyond Meat could drive its opex rate down to 15% at scale.

On $8.4 billion in revenues, that would translate into roughly $1.3 billion in operating profits. Taking out 20% for taxes, net profits would round out to roughly $1 billion. A market average 16 forward multiple on that implies a 2029 valuation target of $16 billion. Discounted back by 10% per year, that equates to a 2019 valuation target of over $6 billion, implying that prices above $100 for BYND stock are justified by long term fundamentals.

Beware Near Term Turbulence

Although Beyond Meat is justified about $100, investors shouldn’t be in any rush to buy into the stock here and now.

This stock has come very far, very fast, and the law of financial gravity states that this stock is long overdue for a big downturn. That big downturn could happen in early June, when Beyond Meat reports its first earnings as a public company.

Given the huge run-up in Beyond Meat stock since the IPO, it is highly unlikely that those numbers come anywhere close to satisfying very optimistic bulls. Thus, huge investor optimism will likely wane following those results, and that will spark a big sell-off in BYND stock.

Because of this, I don’t think now is the best time to load into Beyond Meat stock. Instead, investors should wait for the earnings report, see how the market reacts to those numbers, and then buy Beyond Meat stock if shares plummet after that report.

Bottom Line on Beyond Meat Stock

Many people are calling the valuation underlying Beyond Meat stock, beyond crazy. But, it’s not. If you take a look at the big picture and project out the potential size of the plant-based meat market, today’s valuation actually fully makes sense. Indeed, the long term growth fundamentals here support BYND stock at prices above $100 by the end of the year.

But, this stock has come very far, very fast, and needs to take a breather. It likely will take a breather in early June after the company’s first earnings report. If the stock does drop big in response to that report, that will be an opportunity to buy. Until then, patience is the key.

As of this writing, Luke Lango was long BYND.


Article printed from InvestorPlace Media, https://investorplace.com/2019/05/beyond-meat-stock-easily-could-rally/.

©2024 InvestorPlace Media, LLC