It’s obvious in retrospect that Beyond Meat (NASDAQ:BYND) stock was in a bubble after its initial public offering. Indeed, it was obvious at the time. BYND stock, almost unbelievably, gained over 800% from its IPO price of $25 in less than three months on the public markets.
Since that peak, the story has been very different: Beyond Meat stock now has declined some 69% from those highs. Monday’s close of $73.60 represents the lowest end-of-session price for BYND since May 13, its eighth session of public trading.
Even after the pullback, Beyond Meat stock isn’t cheap. That said, the story here is better than trading over the past few months would suggest. It’s tempting, perhaps, to compare BYND to cannabis play Tilray (NASDAQ:TLRY), 2018’s biggest post-IPO bubble. That seems incorrect. Beyond Meat has a real business — and it’s performed exceedingly well so far in 2019.
Valuation isn’t perfect, and there are real “falling knife” concerns in the chart. One more key risk lurks. That said, investors shouldn’t just assume that because the bubble has popped, Beyond Meat stock will keep tumbling. At some point, this stock simply will be too cheap.
The Case for Beyond Meat Stock
Again, BYND certainly was a bubble as its price cleared $200. But at $73, this doesn’t look like a bubble stock. Valuation is reasonably expensive: backing out net cash, Beyond Meat stock trades at about 14x this year’s sales, and almost 200x next year’s earnings.
Those multiples aren’t inexpensive, to be sure. But in the context of current growth, they’re at least in the ballpark of reasonable. Sales so far this year have risen 253%. That’s actually an acceleration from 2018, when revenue increased roughly 170%. Earnings should rise nicely once profitability is reached next year, as margins expand and sales growth continues: Wall Street expects a 73% increase on the top line in 2020.
Whatever an investor thinks of the underlying product, consumer response seems awfully positive. Revenue in 2015, according to a prospectus filed with the U.S. Securities and Exchange Commission, was just $8.8 million. It should increase over 30x in just four years, and over 50x in five.
Beyond Meat isn’t giving those sales away, either. Gross margins so far this year have expanded by sixteen full points to 33.2%. The company posted positive operating and net income in the third quarter. This a company with a huge opportunity that, at least in the early going, is capitalizing on that opportunity. Yet shares keep falling.
The Risks to Beyond Meat Stock
Of course, shares have fallen because BYND stock became so overpriced at the highs. Beyond Meat stock still trades at almost triple its IPO price. It’s still up 12% from its opening-day close after the biggest first-day pop since the dot-com bubble.
And valuation is a question mark. 14x 2019 revenue and over 8x 2020 sales doesn’t sound that expensive in a market where a name like Shopify (NYSE:SHOP) is trading at over 25x. But this is a manufacturing play; gross margins might top out in the 40s once scale is reached. There’s still an enormous amount of growth priced into BYND stock at the moment.
There’s also a large debate as to how big Beyond Meat’s market truly is. The company actually has struggled to expand its portfolio past the Beyond Burger. While plant-based, the company’s products aren’t necessarily healthy. And it’s not clear that vegans will embrace a product that’s supposed to mimic meat.
In its prospectus, Beyond Meat suggested its worldwide market could be as large as $35 billion annually. If that figure is too optimistic (and it may be — it’s too early to tell definitively) then peak sales may be much lower than the company, and its shareholders, hope.
And Beyond Meat probably needs a big addressable market because that market is going to be crowded. Privately held rival Impossible Burger is driving sales through Restaurant Brands International (NYSE:QSR) chain Burger King, and continues to raise capital for its expansion.
Hormel Foods (NYSE:HRL) and Tyson Foods (NYSE:TSN) are among the meat producers moving into plant-based alternatives. Kellogg (NYSE:K) will expand its vegetarian-focused MorningStar Farms brand. Above $200, BYND stock was priced as if the company had the market to itself. Above $70, that might still be the case.
From here, the two biggest risks seem to be valuation and competition. Beyond Meat has helped create a brand-new category, but that doesn’t always guarantee long-term success. National Beverage (NASDAQ:FIZZ) had a first-mover advantage in sparkling water, but has struggled as deeper-pocketed competitors have moved in. BYND stock may be cheaper than it was, but again there’s still substantial growth priced in.
That said, there is a sense that some investors are misreading BYND stock even at these levels. There are arguments over whether the product is healthy or whether there are enough vegans to drive sales — when Beyond Meat isn’t pitching its products to vegans or as a lower-calorie/healthy option. Some investors might assume that the trajectory here will follow that of TLRY, whose shares haven’t really stopped sliding from last year’s peaks.
It’s worth remembering that Beyond Meat itself had nothing to do with the parabolic rise in its shares after the IPO. And it’s worth considering what this story might look like if, say, the company had gone public at $40 and peaked at $85 instead of $239. The narrative here might be more about how well the company had performed this year, and what its opportunity might be going forward. Will McDonald’s (NYSE:MCD) finally come around? Can restaurant sales, which have quintupled this year, keep soaring?
Crazy trading this summer shouldn’t change that narrative. Beyond Meat has performed well. It has an enormous opportunity in front of it. I’m not quite convinced that combination makes BYND stock compelling at $73. But it’s certainly more attractive than skeptics seem to think.
As of this writing, Vince Martin has no positions in any securities mentioned.