To say that Beyond Meat’s market capitalization has been bid up to overinflated levels since going public would be a drastic understatement. In May 2019, the popular plant-based meat company (NASDAQ: BYND) began trading at 25 dollars per share. By July 26, BYND had reached a price of 234.90 dollars per share, an increase of +840 percent. Since reaching that all-time high, the stock price has retreated, closing at 154.34 dollars on September 2. Even with the recent pull-back in price, the company has nonetheless appreciated +517 percent from its Initial Public Offering (I.P.O) price. As someone who considers the acronym I.P.O. to mean “It’s Probably Overpriced” as opposed to its traditional definition, one can assert with confidence that my feelings of Beyond Meat from an investor’s point-of-view are not nearly as favorable and optimistic as the recent surge in its stock price suggests. The term “bubble,” which is commonly tossed around in the financial marketplace, refers to any segment of a particular asset class that is both quantitatively inflated and qualitatively empty. One prominent example of a financial bubble occurred in late 1990s. Thanks to the advent of the internet, a new wave of technology companies was swarmed by speculative risk-takers and thus bid up to astronomical levels on the major stock exchanges. One example of such a company was Pets.com, an online pet supplies firm founded in 1998. At the time of its I.P.O. in February 2000, Pets.com traded for 11 dollars per share, implying a valuation of 82.5 million dollars. After rising to a high of 14 dollars per share, the tide quickly turned for Pets.com. It soon became clear that the business was not generating any substantial net income. However, this should have come as a surprise to anyone. In the three fiscal quarters leading up to its I.P.O., Pets.com losses ballooned from 3.5 million dollars to a whopping 42.4 million dollars. In the end, efforts to offset such losses with increased sales and lower costs failed. As a result, Pets.com closed up shop only nine months after its I.P.O. at a price of 0.22 dollars per share. In other words, investors who bought shares at 11 dollars in February 2000 experienced a loss of -98 percent on their initial principal.
Focusing now on Beyond Meat, an overly optimistic outlook for future growth prospects has been priced into the stock making the security overvalued at its current price. That is not to say that the plant-based meat industry as a whole is doomed. In fact, I would argue the exact opposite. In 2019, the industry was valued at 12.1 billion dollars, with an expected Compounded Annual Growth Rate (CAGR) of 15 percent through 2025. Though Beyond Meat has impressively grasped hold of the first-mover advantage within the sector, competition will continue to expand, as more and more companies will seek to profit from an increased consumer demand for plant-based meat. This will make Beyond Meat’s ambitious scaling efforts more difficult to accomplish. The company already needs to maintain an annual revenue growth rate of +35 percent in order to maintain its current valuation. Furthermore, a challenge many young firms face in the world of scaling is being able to mass produce enough goods in order to cut costs and increase profits. Eluding back to Pets.com, a large reason the company went out of business is because it was unable to reduce costs so that products were being sold for more than production costs.
In July 2019, BYND announced mixed quarterly results, although the report itself was rather sub-par. The company did deliver a substantial revenue beat, with net sales increasing to 67.3 million dollars as opposed to the 52.7 million dollar figure predicted by Wall Street analysts. However, a troubling sign was the revealing of a much wider loss in net income than originally anticipated. For Quarter 2 2019, Beyond Meat reported a net loss of 9.4 million dollars, or -0.24 dollars per share. This figure was far greater than the estimated net loss of -0.08 dollars per share crafted by analysts. Such results indicated that Beyond Meat was seeing a large increase in demand for its vegan meat products, but also faced stronger headwinds in terms of scaling the business to deliver steady profits. Revenue can be misleading, as it does not account for the costs associated with obtaining revenue. This is why scaling and other cost-cutting measures are so important for any business, especially young businesses who typically do not have as much cash on the books as older, more well-established companies.
All in all, I would argue that BYND has been bid up to bubble-like prices. In my opinion, far too much growth and success has been priced into the security throughout the months following the company’s I.P.O. It appears as though not enough investors are aware of the very real challenges facing Beyond Meat in the future. It is true that Beyond Meat has secured critical partnerships with prominent businesses, such as McDonald’s and Dunkin’ Brands. However, if the company is unable to effectively manage the capital acquired from such partnerships in a worthwhile manner, losses will continue to expand. It is apparent that expectations are extremely high for Beyond Meat. Due to my skepticism surrounding the plausibility of effectively executing such large goals, I would not advise a long position in BYND. The company is expected to announce its Quarter 3 2019 earnings on November 4, 2019. Analysts are expecting earnings per share of 0.04 dollars. The upcoming earnings release will reveal to investors and spectators whether or not the company has been able to improve lackluster scaling efforts. Up until then, expect volatility of the stock to increase.