There are plenty of investors who believe fake meat producer Beyond Meat (NASDAQ:BYND) is something close to a bubble. It doesn’t take a long look at Beyond Meat stock to support that opinion.
After all, Beyond Meat actually was a bubble last year, when it went from an initial public offering price of $25 to nearly $240 in three months. Even after a recent pullback, it still looks overvalued.
Based on the midpoint of 2020 guidance, shares trade at about 11x revenue and roughly 125x Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). Admittedly, those multiples aren’t out of line for growth stocks at the moment.
But this is a food manufacturer with 2020 gross margins in the 33-35% range. It’s not a software-as-a-service developer driving recurring revenue at gross margins over 70%. Meanwhile, competition remains intense. Pricing pressure is on the way. It seems reasonably easy to make the bear case, even with Beyond Meat stock down 29% over the past thirteen trading sessions.
I’m skeptical it’s quite that simple, however. The fact is that Beyond Meat’s potential suggests the stock actually could be cheap right now. Yes, shares still are up almost 260% from last year’s IPO price. Near-term fundamentals look overvalued and maybe bubbly. Take the long view, however, and the stock can easily grow into its valuation … as long as its market keeps growing.
Valuation Isn’t Crazy
Even in a market well off its highs, there are growth stocks out there for which it’s difficult to generate a reasonable fundamental case, even assuming years of growth ahead. Shopify (NYSE:SHOP) and Tesla (NASDAQ:TSLA) come to mind, and both have seen valuation concerns return to the fore over the past few sessions.
That’s not to say bears are necessarily right, or that there’s no fundamental case for either name. Rather, it’s tough to make the numbers work for a stock like Shopify that is still trading around 27x revenue, or for an automaker like Tesla at 50x forward earnings (assuming those estimates are correct).
Again, on its face, Beyond Meat seems like a similar play. But, truthfully, it’s not difficult to support the current price around $90. Revenue should come in around $500 million in 2020, based on guidance, rising well over 60% year-over-year. EBITDA margins are targeted to the mid-8% range, owing in part to investments in marketing and research and development.
It doesn’t seem that unlikely that Beyond Meat can get sales over $1 billion, with 2022 a reasonable target. That would require a compound annual growth rate of about 41% over two years — a deceleration from the 60%-plus expected in 2020. Move EBITDA margins into the low double-digits and Beyond Meat stock is now trading at about 50x 2022 EBITDA or less, and in the range of 5x revenue.
To be sure, neither multiple is necessarily cheap. Even the largest processed food manufacturers like General Mills (NYSE:GIS) and J.M. Smucker (NYSE:SJM) trade under 3x revenue, and below 20x EBITDA. But those companies are mature and low growth. Beyond Meat is neither, and won’t be come 2022.
How Beyond Meat Stock Keeps Rising
Again, this is not to say that the stock is an obvious steal. Rather, it’s just to say that there is a fundamental path to upside here. The company has estimated its addressable market at $35 billion simply in the U.S. Take even 10% of that, assume 15% EBITDA margins, and Beyond Meat likely doubles. (That assumes a 20x EBITDA multiple, and a 30-35x multiple to earnings per share that would likely be in the $6 range.)
To be sure, that would take several years, and there are stumbling blocks across the board. Those margins may be a touch high in an industry that may become “commoditized.” Privately held Impossible Foods recently cut its prices 15%, and Beyond Meat likely will be forced to match. Competition in the grocery channel is rising from Maple Leaf Foods’ (OTCMKTS:MLFNF) Lightlife, the likes of Tyson Foods (NYSE:TSN) and Kellogg (NYSE:K), and eventually private-label producers as well. Giant Sysco (NYSE:SYY) is going after the foodservice channel.
Those rivals can take share, but in the meantime they can also pressure pricing and thus profit margins.
That said, there’s room for Beyond Meat to get well beyond 15%. Margins expanded 30 full points just between 2018 and 2019 as the company swung to an EBITDA profit from a loss. Higher sales will drive manufacturing efficiencies and lower pea protein costs. Beyond Meat can respond to lower pricing over time via lower cost of sales and leveraged operating expenses — as long as revenue grows.
And that revenue should grow as long as the market for fake meat does the same. But that’s not guaranteed. We’ve seen trends like organic and gluten-free fizzle out to at least some extent. Both categories still exist, but they haven’t quite been the game-changers that some investors thought they would be. Even Whole Foods Market sold itself to Amazon (NASDAQ:AMZN) in 2017 at a price well below its 2015 highs.
Some investors may worry about history repeating itself. Although I see Beyond Meat as intriguing below $100, as I did last year, I can’t blame them. But it makes Beyond Meat stock rather simple. An investor who believes in plant-based meat should own this stock, because even up 260% from its IPO price, category growth likely leads to upside.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. As of this writing, he did not hold a position in any of the aforementioned securities.
