After a meteoric rise in 2019, the share price of plant-based burger maker Beyond Meat (NASDAQ:BYND) has dropped in recent months. Now that Beyond Meat stock is trading under $120 per share, many are wondering whether it’s a good time to buy the stock. After all, the share price was more than twice as high back in July. But the meat-replacement manufacturer could have a bumpy road ahead as legal troubles, competition and high expectations weigh on its share price.
Here’s a look at three reasons why investors should proceed with caution when it comes to Beyond Meat.
Beyond Meat’s Legal Difficulties
It’s remarkable how little attention Beyond Meat’s legal issues have gotten. When the firm went public last year, there were few questions about its ongoing legal battle with Don Lee Farms, which used to makes its products. The two companies have been locked in an argument regarding their exclusive manufacturing contract, and the dispute is set to go to trial on May 18.
Don Lee alleges that Beyond violated an agreement the two companies had made and shared its trade secrets with new suppliers. What’s more, Don Lee recently listed Beyond Meat’s CFO as an additional defendant in the case, accusing him of fraud. According to Florida trial attorney Donald E. Peterson, the fact that Beyond Meat CFO Mark Nelson has been named a defendant is significant.
“Adding individual defendants is common and most claims eventually fail because the officer or employee was acting on behalf of the corporation (etc.) But, adding the CFO as an individual defendant this late in the litigation indicates (Don Lee) probably has triable issues concerning the CFO’s role. The parties have had adequate opportunity to develop the facts through discovery.”
Don Lee claims that Nelson and other Beyond Meat employees falsified documents. Peterson says that if that’s proven to be true, it could have a significant impact on the case.
“Alleging that BM altered the test reports is a serious matter. Sometimes, the cover up is worse than the initial cause of action,” the lawyer said
Beyond Meat’s Competition Is Rising
Beyond Meat is facing intense competition in the plant-based meat market. Even though the company has celebrity backers, going up against big names like Tyson Foods (NYSE:TSN) who have their own vegetarian meat lines is a huge undertaking.
Plus, there are other, smaller companies vying for the same consumers whom Beyond Meat is pursuing. Namely, Impossible Foods, whose “Impossible Burger” has proven to be direct competition for the Beyond Meat burger.
It’s also worth considering that regular, animal-based meat is a competitor for Beyond Meat as well. While the plant-based movement is certainly gaining momentum, these kinds of trends have been coming and going over the past few decades.
Some have criticized Beyond Meat’s products, saying that they aren’t a healthy alternative because they’re heavily processed. Harvard Medical School found that processed, plant-based burgers are high in saturated fat and sodium.
On top of that, surveys show that a whopping 84% of vegetarians give up on the plant-based lifestyle within a year.
Valuation Concerns
Finally, Beyond Meat stock is priced for perfection. Right now the stock is trading at 287 times its forward earnings. That’s head and shoulders above the S&P 500’s average P/E ratio of 19.
That kind of elevated valuation is risky for any company, let alone a consumer goods firm with legal trouble. The problem with stocks with sky-high valuations is that they makes traders jumpy. One misstep, even a tiny one, can send the share price crashing back down to earth. That’s something to keep in mind, especially with the company due to report its quarterly results at the end of this month.
The Bottom Line on Beyond Meat Stock
At its current valuation, Beyond Meat is far too expensive. The firm looks unlikely to return to its July highs any time soon, especially with Don Lee’s lawsuit about to erupt in the spring. The investors who bought Beyond in December when it was under $100 should consider themselves lucky and take their money and run.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.
