Simply put, I’m not sold on Beyond Meat (NASDAQ:BYND). But my skepticism toward Beyond Meat stock doesn’t derive (purely) from the stock’s hefty valuation.
To be sure, Beyond Meat stock looks expensive. It trades at almost 20x trailing twelve-month revenue — and this is a food manufacturer, not a software company. Earnings multiples look similarly stretched: Beyond Meat trades at 210x the consensus earnings-per-share estimate for next year.
But I’m willing to pay up — and pay even these multiples — for the right kind of business. Just this week, I’ve recommended DocuSign (NASDAQ:DOCU) and HubSpot (NYSE:HUBS), neither of which look close to “cheap” based on near-term metrics. That’s because as we’ve seen in this market time and time again, companies with secular growth tailwinds and the ability to dominate their markets are going to merit aggressive valuations.
The problem at the moment is that Beyond Meat is being treated like one of those companies. Yet I’m far from convinced that it actually is. Despite impressive headline numbers, last week’s second quarter earnings report did little, if anything, to change my mind.
A ‘Stay at Home’ Tailwind
The novel coronavirus pandemic created an opportunity for Beyond Meat. The closure of restaurants nationwide led consumers to do more grocery shopping and more cooking at home. Indeed, Kroger (NYSE:KR) saw comparable-store sales increase 30% in March, and 19% for the first quarter as a whole.
That in turn created a natural base of first-time buyers of Beyond Meat products. To its credit, Beyond Meat took advantage.
Sales in the retail channel almost tripled year-over-year to $90 million. And, showing the effect of the pandemic (as well as warmer weather), that compares to $50 million in the first quarter.
Certainly, that growth is impressive. And it seems like good news for Beyond Meat stock, even if investors didn’t see it that way (BYND fell almost 7% after earnings).
But the growth right now doesn’t answer a worry I’ve long had toward Beyond Meat and its category: that it’s simply a fad. Consumers are under the impression that plant-based meat is healthier. That’s not necessarily the case. Beyond Meat is heavily processed, and even that aside not all that healthy based on standard nutritional metrics.
Personally, I don’t think the taste comes anywhere close to that of real meat.
Again, Beyond Meat and its grocery partners deserve credit for driving the revenue growth seen in the second quarter. But what really matters for Beyond Meat’s stock is not whether consumers buy it once, but repeatedly.
Driving growth in the perfect environment is one thing. Doing it once normalcy returns, and consistently, will be another.
Competition and Beyond Meat Stock
There’s another aspect of earnings that calls the Beyond story into question: gross margin.
Here, too, the news looks reasonably good. Excluding costs related to the pandemic, gross margin came in at 34.9%. That’s 110 basis points better than the year-prior quarter.
But it’s down sharply from the 38.8% print in Q1. And the compression goes to a significant concern for Beyond Meat, which is pricing.
After all, gross margin should be expanding year over year: again, sales nearly tripled. The benefits of scale should be particularly acute for a plant-based meat manufacturer. To see a barely one-point increase YoY, and a significant compression quarter-over-quarter, suggests that Beyond Meat is facing pricing pressure.
That’s not a surprise. To some extent, it was planned: in the second quarter release, Beyond Meat itself highlighted a successful late-quarter launch of its “Cookout Classic” value pack. But competition may well be a larger factor.
Indeed, privately held rival Impossible Foods appears to be discounting heavily thanks to yet another capital raise. And competition is going to stay intense, with private-label entrants, Kellogg (NYSE:K) unit Morningstar Farms, and myriad others. If that competition keeps a lid on margins, Beyond Meat stock has a problem at this valuation.
Fade the Rally
Indeed, the margin concern seems the likely cause of BYND’s post-earnings pullback. The stock now has traded basically sideways for three months ago, despite a clear willingness elsewhere in the market to pay up for growth.
That’s a concern. And I believe it reflects the core problem with Beyond Meat stock right now: it’s not driving the kind of growth investors can get elsewhere in the market. There is a tailwind behind the industry right now, but it may not last. And even if the market grows, competition is going to keep a lid on Beyond Meat’s numbers.
Those are the problems with Beyond Meat, not just the hefty valuation. And those two issues are why I believe the stock is likely to fade from these levels.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.