The market was not impressed by Beyond Meat (NASDAQ:BYND) earnings last week. Beyond Meat stock fell 27% after the release. Honestly, it could have, and should have, been worse.
Admittedly, I’ve long had a bearish take on BYND stock. And, admittedly, it has done better than I expected, rallying 83% so far this year.
But all of those gains came in the first four and a half months of the year. Since mid-May, the stock has traded flat despite a continued rally elsewhere in the market.
There are reasons for that, I believe. And last week’s earnings highlight those reasons. The biggest one is simple: There’s still a very real risk that Beyond Meat’s plant-based options are a fad, or something close.
That risk remains until the company proves it doesn’t. The Q3 earnings didn’t do so. Instead, it strengthened the bear case.
Problems With the Growth Story
The bull case for Beyond Meat stock requires that the company expand its reach well beyond vegans and vegetarians. The market of consumers who don’t eat meat at all simply isn’t large enough. That’s particularly true given how much competition there is in plant-based meat, ranging from traditional (and massive) food companies to other newer entrants like Impossible Foods.
That, in turn, requires that meat-eaters both try Beyond Meat products, and then remain as customers. Beyond Meat got help on the first part thanks to the novel coronavirus pandemic. Stuck-at-home consumers upped their grocery shopping, and the company posted impressive growth in its retail channel.
In Q1, Beyond Meat sales rose 141%. U.S. retail revenue climbed 157%, with domestic foodservice growth only one percentage point lower. In Q2, an even larger pandemic-driven tailwind led overall retail revenue to nearly triple.
But in Q3, the growth rate slowed dramatically. Total revenue increased just 3%. That alone is a red flag.
This is a company supposedly still early in its growth. Beyond Meat stock still trades at over 20x revenue — a multiple more usually applied to a high-margin software company. A 3% increase in revenue isn’t cutting it.
Now, as Beyond Meat management argued, the Covid-19 tailwind did slow in the quarter, which led retail growth to drop to just 39% year-over-year. But if that’s truly the case, we’d expect foodservice sales to rise nicely as consumers started getting back to normal.
That’s not what happened. In the U.S., foodservice revenue declined 11%. That’s with fast-food companies (some of whom are Beyond Meat customers) generally showing flattish growth in the quarter.
Overseas, the news was even worse. Foodservice sales plunged a stunning 65%.
This is a quarter that simply isn’t good enough.
Where Are the Repeat Customers?
Again, the Beyond Meat story requires that consumers try the product and then become regular customers. It’s hard to look at Q3 numbers and believe that’s the case.
It may be that the product doesn’t taste good enough. (Personally, I haven’t been impressed.) What’s more concerning is that consumers may be catching on to the heavily processed, chemical-laden nature of plant-based meat.
Whatever the cause, it does not look like Beyond Meat is building a huge base of repeat customers. It seems like the opposite. In the retail channel, bored shoppers took a flyer on Beyond Meat in Q1 and Q2. Most didn’t stick around in the third quarter.
What makes matter worse is that Beyond Meat was pushing its products hard. In the 10-Q filing with the U.S. Securities and Exchange Commission, Beyond Meat highlighted two moves that should have boosted revenue.
First, some product destined for the foodservice channel was re-packaged and re-routed to retail. Second, Beyond Meat was aggressive on the promotional front.
Indeed, gross margin plunged in Q3, to 27% from 35.6% the year before. Gross profit dollars actually declined 22% year-over-year.
Those figures, too, are not those of a growth stock. Yet Beyond Meat stock, at over 20x revenue, certainly is priced as such.
Beyond Meat Stock Didn’t Fall Far Enough
Some investors might see this analysis and argue, “Well, Beyond Meat stock fell 27%, didn’t it?”
It did. But BYND also rallied sharply through the beginning of last month. Again, the stock is basically flat over the past six months.
And so I don’t see the post-earnings decline as nearly big enough. It simply gets Beyond Meat stock back to where it was at the beginning of September.
That doesn’t make sense, because the news from earnings alone makes this story look worse than it did two months ago. This is a supposed growth story that just posted a quarter with minimal revenue growth and plunging gross profit.
Yes, the pandemic was a factor — but it’s not the only factor. Rather, the pandemic gifted Beyond Meat a huge opportunity to acquire new customers this spring, and there’s basically zero evidence that the company capitalized on the opportunity.
That’s a big problem. In fact, given where BYND still trades, it’s a huge problem. And it’s more than enough to warn investors to stay away from Beyond Meat stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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