As you may know, I’ve long been a bear on Beyond Meat (NASDAQ:BYND) stock. Namely, due to the risk that its plant-based “meat” products are more a fad than a long-term trend. Sure, there’s a substantial market to cater to among vegetarians and vegans. But even that’s not a big enough pool of a user base for this company to live up to investor expectations. Instead, it needs mass adoption of plant-based “meat” among omnivorous eaters.
The problem? It’s questionable whether this will even happen. Many have tried the product, but there’s little to suggest these first-time users have become repeat customers. Yet, bulls so far have decided to ignore this concern.
Not that enthusiasm for this stock has been off the charts. Shares rapidly rebounded from their coronavirus crash losses in March 2020. But, in the second half of last year, the stock zig-zagged between $125 and $195 per share.
It’s holding steady now. But, don’t expect it to continue to do so. Much less, head back toward all-time highs above $200 per share. So, what does the future hold for shares? As it continues to disappoint with its quarterly results, substantial losses could be ahead. That gives you good reason to sell it if you own it, and avoid it if you’ve yet to enter a position.
BYND Stock: There’s Now a Stronger Bear Case
Despite its resiliency, the bull case for Beyond stock has weakened over the past year. That’s clear from the company’s most recent quarterly earnings report. It missed on revenue, with wider-than-expected losses. On a year-over-year basis, growth was anemic (around 3.5%).
Much of this has to do with the pandemic. Covid-19 lockdowns helped to dramatically boost demand for its customer-based business (Beyond Meat products sold in grocery stores). But, the virus has been bad news for its food service sales. Sales to this segment could improve, as the service economy recovers post-virus. Beyond has also locked down deals with two major fast food operators. But, even the company itself admits the near-term impact from these deals will be modest at best.
And, this isn’t the only problem on the company’s plate. With the added hurdle of its main plant-based “meat” rival slashing prices, margin compression remains a big risk as well. So, with all these issues, plus the longstanding concern that synthetic meat is just a fad, why do investors continue to give BYND stock a rich valuation?
It’s a question many long this stock have yet to ask themselves. But, if they start doing so, looking at this “story stock” with a more critical eye, shares may take a substantial plunge some time down the road.
Richly Priced, Beyond Has Lots of Room to Fall
At 14.4x estimated 2021 sales, BYND stock trades at a valuation on par with cannabis or electric vehicle (EV) stocks. But, unlike those types of plays, backed by long-term trends such as pot legalization, or vehicle electrification, this plant-based “meat” company doesn’t have such a “megatrend” on its side.
Sure, there’s been a big push in recent years for plant-based health. Not just for health reasons, but for environmental reasons as well. This trend has picked up steam in recent years. But, as seen from its slowing sales growth, there’s more evidence things are decelerating rather than accelerating.
In short, there’s little justification for the stock’s current growth premium. So, what’s a more reasonable valuation for Beyond Meat shares? That depends on its eventual profitability. For now, investors are not valuing this company on its current year results. Or, even its results in 2022, when it’s expected to generate earnings of 22 cents per share.
Instead, its current market capitalization (around $8.2 billion), is built on its potential value down the road, when it fully scales up, and lets its foot off the gas. However, given the specter of margin compression, it’s hard to tell whether this company, at scale, can even become a high-margin business.
There’s not much rationale giving this stock a valuation premium to other packaged/processed foods companies, most of which trade for single-digit price-to-sales multiples. In other words, big downside ahead, if Beyond continues to disappoint.
Ahead of a Possible Blow Up, Sell into Strength
Last Month, Barron’s listed Beyond Meat as one of ten stocks most vulnerable to a blow up. And given what I discussed above, it’s easy to see why. Priced like a megatrend stock, when in reality its business is built on a passing fad, valuation contraction remains a big risk.
For now, those still confident in its prospects may ignore the warning signs. But, as we see subsequent underwhelming results, something has to give. So, what’s the best move with BYND stock? Sell into strength (while you still can).
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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