Beyond Meat Inc. (BYND, Financial) has been on an upward tear since its public market debut earlier this month. While a number of big-name tech initial public offerings fizzled right out of the gate, Beyond Meat’s stock has defied gravity, repeatedly extending its ferocious bull run.
Yet, upon close inspection, it becomes clear that there is little substance to the market confidence buoying Beyond Meat. Eventually, reality will have to take its toll on this high-flying speculative stock.
A wild run from day one
At first, Beyond Meat opted to target a fairly conservative valuation at its IPO, but obvious market enthusiasm quickly rubbed off on the company and its underwriters. It upped its initial target price range of $19 to $21 a share to $23 to $25, as well as the number of shares it planned to issue. On the eve of the IPO, Beyond Meat was aiming to raise up to $240 million at a valuation of about $1.4 billion.
While other recent IPOs had been quite rocky, Beyond Meat was flying right out of the gate. Shares surged on the first day of trading, and the enthusiasm has failed to die off. Shares closed at $98.59 on May 30, translating an eye-watering valuation now approaching $6 billion.
Clearly, the market has already priced in massive expectations. But can Beyond Meat really bring home the bacon?
Everyone is looking at the top line
Beyond Meat has unquestionably experienced rapid operational growth over the past year. The company reported revenues of $87.9 million in 2018, up from $32.4 million in 2017, an increase of nearly 170% year-over-year.
That revenue growth has been driven by rapid expansion of the reach of Beyond Meat’s products. Most impressively, Beyond Meat has managed to get its products served at around 12,000 restaurants across North America, including 1,100 Carl’s Jr. locations, which drove a 424% increase to revenue from this sub-segment. The retail segment was no slouch either; the sub-segment posted a 99% year-over-year revenue increase.
But the bottom line tells a different story
While top line growth has been impressive, it has yet to translate to the bottom line. Indeed, net operating loss after tax increased by 48% in 2018 compared to year prior, from $13 million to $19 million.
Of course, net losses are to expected from high-growth companies investing in their futures. But, in the case of Beyond Meat at least, these investments are far from certain to pay off.
The company has been spending increasing amounts on marketing, and it intends to spend big on R&D. These are necessary expenses for a growing company vying for market dominance, but Beyond Meat’s ability to deliver the goods remains very much to be seen.
A beneficiary of market psychology
A major factor driving Beyond Meat’s phenomenal stock performance appears to be a well-known quirk of market of market psychology. Specifically, investors seem to be imputing the company with the role of industry standard-bearer, effectively assuming that the big expectations for industry growth over the next decade will translate to massive profits down the line for Beyond Meat. This is a highly dubious assumption.
Beyond Meat also seems to be receiving an updraft from another related phenomenon of market psychology: treating the public market players in a growth industry as if they are the only players that matter. But even a casual survey of the plant-based meat substitutes industry demonstrates that this is simply not the case here.
Indeed, Beyond Meat faces formidable competition already, with more on the horizon. Impossible Foods’ Impossible Burger, for example, has made waves in recent months thanks to its addition to the menus of numerous major fast food chains.
Verdict
Overall, there is little to justify Beyond Burger’s bloated market capitalization. Indeed, it hardly looked like a buy at its target IPO trading range. Thus, we anticipate a considerable downward correction in this stock’s future.
Shorting Beyond Meat at this time presents some challenges, however. A relatively low float makes shorting directly both costly, as well as prone to volatility and liquidity issues. Options remain underdeveloped in this name as well, making puts a potentially expensive alternative.
The best play right now seems to be to wait and see. This will become a short in relative short-order, but investors should be patient. Highly speculative story stocks can do all sorts of wild things in the short term. A lock-up expiration and future earnings reports should set up the short side nicely ere long.
Disclosure: No positions.
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