There’s a reasonably simple case to be made against the valuation currently assigned Beyond Meat (NASDAQ:BYND) stock. Beyond Meat stock obviously isn’t a tech play — but it’s valued like one.
Indeed, based on revenue over the past four quarters, BYND stock trades at 25x sales. Outside of healthcare and mining, there isn’t a non-tech stock anywhere near that valuation. In the sector, Freshpet (NASDAQ:FRPT) and Monster Beverage (NASDAQ:MNST) are the only remotely similar stocks with big price-to-sales multiples. Those stocks trade at 12x and 8x revenue, respectively.
But that case seems a bit too simplistic for a couple of reasons. First, if an investor squints, BYND is to some extent a tech stock. After all, the company has spent years and tens of millions of dollars creating a plant-based product that, as best as possible, replicates real meat.
Second, there aren’t public companies out in the sector with the growth opportunity Beyond Meat has. As long as growth continues, the valuation still can work.
Indeed, I thought BYND stock was intriguing at the end of 2019. At a sharply higher price, I am sympathetic to valuation concerns — but still see upside. That is, if Beyond Meat’s product is as good as bulls believe.
BYND Stock Can Grow Into Its Valuation
Again, on its face, the valuation here looks excessive. 25x trailing sales are huge. So is 240x next year’s consensus earnings per share estimate.
But the growth that Beyond Meat has posted has been huge as well. Sales rose 239% in 2019. The top line expanded another 141% in the first quarter, with those results crushing analyst expectations.
Coming into this year, Beyond Meat expected 2020 sales of about $500 million, up about two-thirds year-over-year. The novel coronavirus pandemic has upended those plans. Beyond Meat’s retail sales have benefited, thanks in part to meat shortages, while its restaurant business unsurprisingly has taken a huge hit.
Still, net/net the company clearly is headed in the right direction, with a long runway for growth. BYND is expanding in China, signing a deal with Yum China (NYSE:YUMC) and another agreement with a local distributor. A new facility in the Netherlands opens the European market as well.
Assuming a base of sales of $500 million in a ‘normal’ 2020 (analysts at the moment are forecasting about $460 million), there’s a path to reasonably solid profitability. Beyond Meat should be able to get sales to the $2 billion level within a few years: a 32% annual growth rate would hit that target in five years. At a 10% net income margin, BYND stock would be trading at under 50x out-year earnings.
Obviously, that’s a huge multiple. But growth doesn’t suddenly end at that point. Indeed, an investor reasonably could expect sales that could clear $10 billion at some point.
After all, meat sales were $1.4 trillion globally in 2019, according to Beyond Meat’s 10-K filing. With reasonable profit margins, a small portion (just 1%!) of that market suggests Beyond Meat could earn over $1 billion annually. BYND stock in that scenario probably triples, providing solid returns even if that process takes a decade or longer.
What Goes Wrong
Put another way, I’m skeptical an investor can or should dismiss BYND stock based solely on valuation. But there are other risks.
The two most obvious are competition and margins. Obviously, the two are tied together. Impossible Foods remains private, but may go public at some point. It’s established a strong business with Restaurant Brands International (NYSE:QSR) unit Burger King. Forum Merger Corp. II (NASDAQ:FMCI), a special purpose acquisition corporation, reportedly is in talks to bring another plant-based meat company to the markets.
There are going to be many, many companies targeting the market, including efforts from the likes of Tyson Foods (NYSE:TSN) and foodservice giant Sysco (NYSE:SYY). Beyond Meat has a head start, but it will need to keep improving its product and keep executing to stay atop the industry.
The second risk is on the margin front. Those competitors are going to at least consider discounting to gain market share. Beef prices will return to normal at some point. The risk is that plant-based meat becomes “commoditized”, leading to consistent pricing pressure and weak margins even over the long term.
These risks are real. But they’re only real if Beyond Meat’s product isn’t compelling.
If any company can make a good-enough plant-based burger, then Beyond Meat stock is ridiculously overvalued. But if Beyond Meat is differentiated; if its products are just that good; then there’s a multi-year, and likely multi-decade runway for growth that makes BYND stock a buy at the moment.
And so from a broad standpoint, BYND stock simply is a bet on the nature of its product. Investors who believe the product is compelling should see the stock the same way. Those who don’t will see far better opportunities elsewhere in the market. Valuation alone doesn’t, and can’t, decide that debate.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.