Beyond Meat (NASDAQ: BYND) stock is up 98.5% in the past month, and I can’t shake the feeling that I’ve seen this movie before. Much of the move has happened in the past week, after Beyond reported 141% revenue growth in the first quarter.
In a vacuum, that growth level is unquestionably impressive. But this rally is similar to last year when BYND stock skyrocketed from its IPO price of $25 in May, to its all-time high of $239 in July.
Beyond Meat expectations are too high given there is so much risk to its business outlook. It’s valuation is pricing in way too much success.
The Expectations For BYND stock
The first place to start when looking at BYND stock is to put the company’s growth numbers in context. Yes, the company’s revenue was up 141% in the first quarter. However, consensus analyst estimates were calling for 119% growth. So it was definitely a beat, but nobody is questioning Beyond Meat’s growth outlook.
At the same time, much of the bullish commentary I’ve seen about BYND stock in the past week has revolved around how much of an opportunity Covid-19 has created for the company. The argument seems to be that meat shortages and rising beef prices will help drive adoption of Beyond’s products.
Finally, Beyond Meat has partnered with McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX) to test new Beyond Meat menu items. McDonald’s tested Beyond products in Canada. Starbucks is testing them in Canada and China. The general expectation seems to be that these partnerships will ultimately be extended nationwide in the U.S. market as well.
Unfortunately, for every opportunity Covid-19 has created for BYND stock, it has also created risks. Restaurants and food services represented about 42% of Beyond Meat’s revenue in the first quarter, a sharp drop from 59% in the previous quarter. That percentage will certainly continue to plummet in the second quarter as restaurants remain closed or reopen with limited capacity.
“Our concern is that many of Beyond’s independent customers may disproportionately struggle and that traffic to national chain customers may not snap-back as quickly as investors anticipate given Q2 unemployment rate [estimates] and at-home consumption remains robust and persists for a longer duration of time than BYND consensus ests imply,” UBS analyst Steven Strycula says.
“In BYND’s retail segment, we observe increased competitor risk from Impossible Foods entering more grocers, and CPG brands introducing competing products in 2020,” Strycula says.
UBS has a “sell” rating and $75 price target for BYND stock.
Despite the near-term risks for Beyond’s business, the biggest problem with the stock by far is its valuation. It’s cool that the company’s revenue is up 141% in the past year. The problem is that its stock price is up 476% from its IPO price in that stretch.
Wells Fargo analyst John Baumgartner recently addressed Beyond Meat’s valuation problem:
In terms of what’s priced into the name, bulls continue to assume a $40B [plant-based meat] market over the next decade, based on PBM capturing a 15% share of the U.S. meat market. Assuming a sustained 16% market share for BYND and an [enterprise value-to-sales ratio] in-line with the U.S. Food median (2.5x), it would imply a stock price of ~$125.
For what it’s worth, Wells Fargo is projecting long-term PBM market share of 11%, not 15%. But even using factoring in the bull case suggests a 10-year price target of $125. That’s probably why Wells Fargo has an “underweight” rating and $72 price target for BYND stock.
How to Play BYND Stock
In the past, I’ve compared BYND stock to another popular growth stock, Tesla (NASDAQ:TSLA). I don’t question either stock’s growth outlook. There is a massive addressable market for plant-based meat. Beyond Meat will continue to land new deals and report mind-boggling numbers. But Wells Fargo’s own bull case projections suggest even if the best-case scenario plays out over the next decade, the stock is still overvalued.
Be extremely careful shorting BYND stock given the huge outstanding short position it has and the potential for short squeezes. But at the current share price, BYND stock buyers are biting off more than they can chew.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.