Early in 2019, the buzz was that the standout IPOs would come from companies like Uber (NYSE:UBER), Lyft (NASDAQ:LYFT) and Pinterest (NYSE:PINS). But these high-profile unicorns wound up being big let downs.
Instead, the top performers this year have been financial, consumer goods and healthcare companies.
Just look at Beyond Meat (NASDAQ:BYND). While the company does leverage sophisticated technology to create plant-based meats, the fact is that it is mostly a food producer in which the valuations are mostly low levels.
But Beyond Meat has gone well beyond this. When the company pulled off its IPO in early May, the shares soared by 163%. Yet this was only a warm-up. By July, the stock price would go above $240.
True, it proved difficult to maintain this (which is typical for many red-hot IPOs). As a result, there was a grueling selloff as the stock has grinded down by 68% from its high.
But even with this, the IPO is still ranked No. 7 among all deals for 2019. The total return (based on the initial offering price): 211%.
So what now? Might we see another run? Or should investors be cautious here?
Well, to answer this question, let’s first take a look at some of the clear advantages of the company. Perhaps the most important bullish factor is that there is a secular trend toward healthier eating. It’s also helpful that more people are mindful of humane practices with animals.
Something else: Beyond Meat has a first-mover advantage. This has helped bolster its brand and allow for significant distribution. The company’s products are available in 28,000 retail locations like Target (NYSE:TGT) and Walmart (NYSE:WMT) as well as 23,000 foodservice outlets, such as Del Taco, Carl’s Jr and A&W. There has also been an aggressive move into international markets, where there are 7,000 locations.
Given all this, it should be no surprise that Beyond Meat has seen torrid growth.
The Competition
Beyond Meat’s dominant position could prove fleeting, though. Let’s face it, the market is getting much more competitive. Some of this is from other startups like Impossible Foods, which has raised $687.5 million.
Yet old-line companies are also retooling their operations to make big plays for plant-based offerings. One is Tyson Foods (NYSE:TSN), which has created a separate brand called Raised & Rooted. And for the most part, the company has been pushing hard to expand the footprint. On a quarter over quarter basis, the distribution went from 4,000 stores to 7,000 stores.
In the meantime, there has been progress from other companies like Nestlé, Kraft Heinz (NASDAQ:KHC) and Conagra Brands (NYSE:CAG). These companies have deep resources, in terms of capital, marketing capabilities and food development expertise.
So with more available options, retail and food services companies will be in a position to negotiate better terms. We may already be seeing this with McDonald’s (NYSE:MCD), which is evaluating different plant-based suppliers for its P.L.T. burger.
Bottom Line on Beyond Meat
Consider the following recent note from analysts at UBS: “While we outline a robust revenue opportunity, we’re more cautious on Beyond Meat’s margin outlook as competition is intensifying, particularly from larger protein processors and packaged food peers who are likely to undercut Beyond Meat price points using excess capacity and a lower gross margin rate profile.”
No doubt, this is certainly scary, especially as the valuation remains at lofty levels. Note that Beyond Meat trades at a nose-bleed 20 times sales (by comparison, a traditional meat producer might fetch a multiple of 1X or 2X). In other words, if there is more deceleration — which is reasonable — the stock price could be vulnerable at current levels.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
