Since its May 2019 initial public offering at $25 per share, Beyond Meat (NASDAQ:BYND) had a stellar rally. Beyond Meat stock touched a high of $239.70 within two months of the debut.
The initial exuberance was driven by the fact that Beyond Meat became the first listed company making plant-based meat substitute. Additionally, the protein alternative producer is on a high growth trajectory, making the stock attractive.
However, the upside failed to sustain and the stock has more than halved from its all-time-high to $106. I believe that the key reason for a sharp correction — beyond the coronavirus sell-off — is the point that Beyond Meat stock was trading far ahead of fundamentals. Even at $115, the stock is trading at a price-earnings ratio of 279.5.
Investors will argue that the PE multiple might be misleading for valuing a high growth company. But my relatively bearish view on Beyond Meat stock is not just because of the valuation factor.
Strong quarterly results can boost the stock from oversold levels. However, there are several factors that need to be considered before any long-term exposure to the stock.
Is Plant-Based Meat Healthy?
One of the potential selling points for plant-based meat is the health factor. Regular consumption of red meat has been linked to health problems like heart disease, kidney problems and digestive issues, among others.
Talking about plant-based meat, Frank Hu, Harvard’s Fredrick J. Stare Professor of Nutrition and Epidemiology, opines that these products “may also contain unhealthy ingredients, such as high amounts of sodium or unhealthy fats.”
This view is further verified by an article from Harvard Health Publishing, which states that “meatless burgers are heavily processed and high in saturated fat.” Research shows that a 4 oz Impossible Burger has 8 grams of saturated fat and the same size Beyond Burger has 6 grams of it. On the other hand, 85% of lean ground beef also has 6 grams of saturated fat.
From a health perspective, this “heavily processed” plant-based meat is not relatively healthy. This factor is likely to have an impact on growth in the coming years for plant-based meat.
Beyond Meat Faces Increasing Competition
Beyond Meat might be growing at a healthy pace, but the company faces stiff competition in the coming years.
Impossible Foods is another company that develops plant-based substitutes for meat products. Recently, Disney (NYSE:DIS) choose Impossible’s burger as a “preferred” plant-based patty for its menus.
Among the bigger companies, the Nestle (OTCMKTS:NSRGF) “Awesome Burger” marks the company’s entry in the meat substitute arena. Even Starbucks (NASDAQ:SBUX) is planning to introduce “plant-based breakfast sandwich of its own.”
It is worth noting that UBS believes that plant-based meat market will grow at a CAGR of 28% from 2018 to 2030. Investors will therefore feel that the market has the capacity to absorb enough players.
However, as competition intensified, there is bound to be pressure on margins and that will tamp valuations. Furthermore, there are analysts who believe that the “plant-based meat market not as big as people think.”
Meanwhile, AT Kearney reported that there is a view that lab-grown meat will overtake plant-based protein by 2040. That’s still two decades away, but cultured meat market is expected to grow at a CAGR of 41% between 2025 and 2040. In the coming years, this will be another source of competition for Beyond Meat.
Concluding Thoughts on Beyond Meat Stock
Even with stellar top-line growth, Beyond Meat has just managed to become profitable at operating level. Further, the company continues to report cash used in operations. With competition from bigger players, the company is likely to face margin pressure and this will impact Beyond Meat stock valuations.
I want to add that with strong top-line growth, the stock might not decline sharply from current levels. However, I am also not expecting a renewed surge. At best, Beyond Meat stock might remain sideways to marginally lower.
If the company can report profitability at operating level on a sustained basis with margin expansion, I see the stock trending higher. That seems unlikely in the foreseeable future.
Faisal Humayun is senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
