When a stock is selling for more than 10 times its previous year’s revenue, like Beyond Meat (NASDAQ:BYND) was at the start of the year, I tend to step back. When it suddenly rises to 27 times sales, I get worried. That’s where BYND stock is trading today, after a tie-up with PepsiCo (NYSE:PEP).
The tie-up is called The PLANeT Partnership. The idea is to combine Beyond’s plant-based proteins with Pepsi’s snack expertise. Pepsi can use the innovation. It makes Frito-Lay, Quaker Oats and Gatorade. Replacing carbs with protein makes dietary sense.
The problem with this is it will take years to come to fruition. Beyond shares rocketed on the news, to as much as $200 per share. The stock opened for trade Jan. 28 at $187, a market capitalization of roughly $12 billion. That’s on estimated 2020 sales of $440 million.
That’s too high. Even PepsiCo stock looks a little rich at this point, selling for 2.8 times sales and 27 times earnings. But at least I have a reason to own it: a dividend yielding 2.99%. Beyond Meat has no profits, thus no dividend. I wouldn’t expect one on a company growing revenues by one-third a year, as it’s doing.
Beyond’s growth in 2019 was driven by restaurant tie-ups. Its sales last year were driven by supermarket distribution at chains like Costco Wholesale (NASDAQ:COST). The deal with Pepsi keeps it ahead of the following pack.
That pack is massive. I wrote about it last year, while Beyond was selling at about $120. The point is that Beyond is better at selling the sizzle of its faux meat than the fake steak.
Analysts at JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) both say that investors are overestimating the upside for Beyond. It could even be a short once the current hype over Gamestop (NYSE:GME) settles down. Just 16% of BYND’s volume is currently short.
Adding plant-based protein, even as a powder, to common snack foods or flavored drinks could change their dietary profile without changing their taste much. Plant-based nacho cheese is already a thing. There are powders containing beef, pork, milk and eggs on the market. The challenge is to get Beyond’s alternatives into products without compromising flavor and at a price competitive with what Pepsi pays now.
That challenge can be met, but Pepsi would be the bigger winner in that case. Tipranks currently lists just five PepsiCo analysts. Their average rating is hold, but the price target is 10% ahead of Pepsi’s current $138 price tag. By comparison, seven out of 17 Beyond analysts are saying sell, with a price target about 32% below the current price.
The Bottom Line on BYND Stock and PEP Stock
The market is treating a long-term deal like a short-term trade. Beyond Meat may be worth $18 billion someday but only when its sales are at least four times higher than they are.
Pepsi, on the other hand, has made a good deal. It’s working with some of the most innovative marketers in the food business. The joint venture has real bottom-line promise, even dietary promise.
A patient investor can buy Pepsi today with a near 3% dividend, wait five years for the promise of the joint venture to be realized and be reasonably certain of a return. The stock’s not bad even without Beyond Meat. With it, it’s even tastier. Just let it age.
At the time of publication, Dana Blankenhorn owned no shares (directly or indirectly) in companies mentioned in this article.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.