Beyond Meat (NASDAQ:BYND) has had a huge run so far in 2020. But, Beyond Meat stock has taken a beating in the past month after reporting some extremely lackluster growth numbers in the third quarter.
Beyond Meat is a classic growth stock. Investors are now dealing with the inevitable fate every growth stock faces eventually. As soon as growth starts to slow, overvalued growth stocks deflate in a hurry. And given Beyond Meat’s current valuation, there is plenty of downside below.
Beyond Meat Stock Valuation
In the third quarter, Beyond Meat reported a 28-cent earnings per share loss and $94.4 million in revenue. That revenue number was particularly bad considering analysts were expecting $132.8 million in revenue. In fact, Beyond’s revenue was up just 2.6% compared to a year ago.
For many stocks, 2.6% revenue growth would be just fine. Not for Beyond Meat. Why? Beyond shares are up 84% year-to-date. The stock now trades at 21.5 times sales and 261.7 times forward earnings. Much of that big year-to-date gain came after Beyond reported 141% revenue growth in the first quarter. Now, 141% revenue growth is a good argument for why a stock is trading at 21 times sales and 261 times forward earnings. But 2.6% revenue growth is not.
In the company’s earnings call, management blamed a drop in panic-driven pandemic stockpiling for the slowdown. The company also said an 11% decline in its foodservice segment was largely due to the pandemic. Fair enough. But if investors are going to blame the downturn in foodservice business on the pandemic, they must also admit that Beyond’s 40.5% increase in US grocery sales was also largely driven by the pandemic.
I’m not the only one to realize there’s a disconnect between Beyond’s large year-to-date gains and its steep drop in revenue growth.
“We believe a higher multiple is justified given continued investments in growth initiatives and [its] clean balance sheet,” Bank of America analyst Bryan Spillane says.
However, the valuation metrics mentioned above suggest much of that future growth is already priced into the stock.
“BYND’s significant exposure to the foodservice sector (51% of 2019 sales) and premium valuation multiple (12x CY21 EV/Sales) position the company to underperform food/beverage peers,” Spillane says.
Bank of America has an “underperform” rating and $81 price target for Beyond Meat.
CFRA analyst Arun Sundaram says rising competition from both new plant-based meat competitors and traditional meat processors will eat into Beyond’s margins. Sundaram says investors should be prepared for Beyond Meat’s fourth-quarter numbers to look similar to the third quarter.
“Margins will likely remain under pressure as long as BYND focuses on reaching price parity with conventional animal meat, prioritizes value-pack products, and incurs inefficiencies due to foodservice disruptions and efforts to expand internationally,” he says.
The biggest near-term wildcard for Beyond Meat will be whether or not the company is the supplier for the McDonald’s (NYSE:MCD) upcoming McPlant menu. Bulls say yes. McDonald’s and Beyond management said…well, nothing.
McDonald’s refused to name a supplier. Beyond CEO Ethan Brown did his best Donald Trump impression, describing the company’s relationship with McDonald’s as “really good, it’s really strong.”
Regardless of whether or not Beyond supplies McDonald’s, I believe the potential upside is already priced into the stock. Investors seem to be assuming Beyond will be the supplier.
Sundaram says a deal with McDonald’s would likely be worth $100 million in sales in the US alone. Yet he maintains a “sell” rating and $80 price target for the stock.
Risk In Growth Stock Investing
Growth stock investing includes an inherent risk that value investing doesn’t. Most trendy growth stocks like Beyond Meat carry with them a price premium based on their growth numbers. As soon as growth starts to slow, that premium disappears in a flash.
Campbell Soup (NYSE:CPB) reported 18.4% revenue growth last quarter, seven times the growth Beyond Meat reported. Campbell shares trade at just 1.6 times sales and 16.2 times forward earnings.
If Beyond finds a way to ramp its growth back up to the triple digits in the coming quarters, it can support its current valuation. But for now, there is significant risk to the downside.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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.