While it’s been a volatile year in general, some sectors have done well. Food companies have been among the big winners. It’s only logical. With everyone stuck at home, people are making more of their own meals. Thus, grocery demand is up. Beyond Meat (NASDAQ:BYND) has rallied sharply in 2020 thanks to this development, with BYND stock adding 46% year-to-date.
And, there is good reason for investor optimism, at least at first glance. A recent study from the Plant-Based Foods Association shows that plant-based proteins saw a sharper jump in stocking up sales than traditional animal-derived meat and dairy products.
Specifically, they found that “refrigerated plant-based meat retail sales spiked at 241% (compared to last year) during peak panic buying and grew at 113% over the four-weeks following peak panic buying.”
To put this in context, plant-based sales had been growing at just shy of 100% year-over-year prior to the coronavirus outbreak. So the 241% jump was truly historic. However, the current level of sales growth is only modestly above the prior trend.
That said, 113% year-over-year growth for plant-based meat products is still incredible. So you can see why Beyond Meat’s investors are excited. However, there’s more to the story.
Rival Brands and BYND Stock
At first glance, Beyond Meat seems to be doing well. It grew revenues more than 140% year-over-year in the most recent quarter. That puts it well ahead of the national trend for plant-based products. Thus, it is taking market share, right? But slow down.
Consider that many of the competing plant-based products just launched in the past few months or are still making their debuts now. Thus competition will increase throughout 2020.
Meanwhile, Beyond Meat is still coasting off new distribution deals and in particular fast food partnerships of its own that it inked within the past 12 months. As those mature, Beyond Meat’s growth rate will slow dramatically.
And let’s be clear. The average grocery store doesn’t want to carry eight different brands of plant-based protein products. Grocery stores make their money selling lots of items repeatedly. They don’t need a bunch of niche products whose inventory hardly turns over. Grocery is a volume business.
As such, the big chains will settle on one or two brands that have the best sales and marketing. Competing against all the world’s biggest food companies, Beyond Meat is going to get eaten alive. They’re a tiny fish swimming among sharks. Speaking of…
Even More New Entrants
A recent news development brings this to light. Archer-Daniels-Midland (NYSE:ADM) and Brazil’s Marfrig Global Foods made this point clear. Marfrig is the world’s second-biggest beef producer, and it, along with Archer-Daniels-Midland, want to diversify their holdings. Given that both benefit from the beef market as it currently stands, they’d potentially face significant losses if plant foods continue to rise.
Thus the two agricultural powerhouses have created a joint venture to launch a plant protein business to augment their existing operations. The entity already produces plant burgers for Burger King and Outback Steakhouses in Brazil; now it aims to scale up production and compete throughout the Americas.
This is the issue for Beyond Meat, Impossible Foods, and the many other start-ups in the space: Everyone sees that this could be a big deal. As a result, most of the world’s largest food companies are already active in the plant-based space. Kellogg (NYSE:K), Nestle (OTCMKTS:NSRGY), Hormel Foods (NYSE:HRL), Tyson (NYSE:TSN) and many more already have plant meat products on the shelves.
BYND Stock Verdict
The market is being flooded with tons of new story stocks. We have names like Peloton (NASDAQ:PTON), the Covid-19 biotech companies, and Virgin Galactic (NASDAQ:SPCE). And more are waiting in the wings.
Against that backdrop, Beyond Meat is fading in excitement. It was the leading trading sensation for a time, but it’s quickly losing its luster to other newer and shinier companies. Even a tailor-made economic event, the pantry restocking rush of early 2020, failed to move the needle too far for Beyond Meat.
Simply put, this seems like a fad company in an unproven industry. Even if plant-based meat takes off, the ultimate winner is likely to be one or more of the huge food companies, not some thinly-capitalized upstart. And, because everyone is already making their own alternative product, it reduces the odds that anyone will want to acquire Beyond Meat at a huge price.
At the end of the day, Beyond Meat is trading at more than 500x forward earnings and 20x sales. This is beyond absurd.
Stable successful food companies tend to sell for 20x earnings or so and something like 3-4x sales. It’s unclear if Beyond Meat will ever become consistently profitable.
And on a price/sales valuation, it’s several standard deviations away from a fair value. As Beyond Meat’s growth plunges in the face of rising competition and the coronavirus sales surge wears off, shares should trend sharply lower.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned HRL stock.