When fake meat maker Beyond Meat [BYND] went public in May of this year at $46, it quickly became the most successful IPO of 2019, surging 43% on its first day of trading. By the closing bell of the last Friday of July, at $234.90, the company had gained more than 410%.
The rapid growth was widely fuelled by near euphoric excitement and hype around fake meat, the type of which has not been seen since 2018’s listings of cannabis companies like Tilray [TLRY]. And, just like Tilray, after a momentum fuelled charge out of the gates, Beyond Meat’s share price inevitably pulled back.
As of 20 September, the stock is, however, trading 34% off its July high, leading to the emergence of an argument that the stock could have far further to fall, due to a lack in fundamentals supporting the share price; the announcement of partnerships triggering unsupported boosts in the share price; competition; and the potential size of the fake meat market being over-forecast.
“It’s trading on hype. So, it could go higher, but it’s a no-touch for us,” Mark Tepper, president and CEO of Strategic Wealth Partners told CNBC last week.
“I think I’d rather go to Vegas right now and put my money on the Cleveland Browns winning the Super Bowl because, just like Beyond Meat, there was a ton of hype surrounding them in the preseason, but it’s fizzled out quite a bit because there are holes that need to be fixed, just like with Beyond Meat.”
“It’s trading on hype. So, it could go higher, but it’s a no-touch for us” - Mark Tepper, president and CEO of Strategic Wealth Partners
From Blue Apron to Dunkin’ Brands Group [DNKN], the announcement of a tie-up with Beyond Meat almost certainly causes a company’s share price to pop, along with that of BYND’s own value.
Shares in Blue Apron surged 35% when it announced the tie-up between the two firms on 16 July, along with Beyond Meat gaining 3.6%, adding $37m to its market value. The same happened again when Beyond’s plant-based sausage was added to Dunkin’s menu on 24 July: Dunkin’s stock popped 1.5% alongside Beyond’s 3.8%, which added $51m to its market cap.
A more recent pop occurred in late August when it was announced that KFC [YUM] was partnering with Beyond Meat to roll out fake fried chicken. Beyond Meat’s share price grew 14% through the week of the announcement, putting an abrupt halt to the pullback it had been experiencing a week earlier.
However, like a number of the partnership announcements, which have included a limited rollout of BYND’s products, it isn’t going to cause sales to increase anytime soon: the firm simply tested the concept in just one store, for just one day, for free.
A further example of such artificial boosts was in late May when McDonald’s [MCD] CEO Steve Easterbrook simply didn’t rule out the possibility of talking to Beyond about a partnership, when asked by a CNBC reporter: BYND’s share price surged more than 13%.
Believe in the hype?
It’s a clear indication of the power of the hype surrounding fake meat and its perceived potential uptake, which isn’t currently backed up by sales – and may not necessarily be backed up by true demand in the long-term (more on that later).
|PEG Ratio (5 yr expected)||-2.01|
Beyond Meat share price vitals, Yahoo finance, 23 September 2019
The stock is currently trading at a (TTM) price-to-sales ratio of over 50, while the consensus forward price-to-earnings ratio is an extremely high 1000, according to data from Morningstar.
Despite being valued at more than $9bn, the firm bought in just $67.3m of sales in Q2 2019. During the same period, meat – and fake meat – producer Tyson Foods [TSN] bought in 16x that amount at $10.8bn in sales; its market cap, however, is little over just three times higher than BYND’s at close to $32bn.
The big one
The McDonald’s question may also be triggering a gambling mentality in investors and boosting momentum that it can be argued shouldn’t be there: since JPMorgan issued a note saying that the shares could gain 30% on news of a tie-up, many investors have been betting on the stock in the hope that this hypothetical situation could play out.
While it’s highly likely that McDonald’s will move into the fake meat offering, the question is whether this will be with Beyond Meat. Burger King has already opted to partner with the firm’s current main competitor, Impossible Burger, and further competition is set to arise from the likes of Tyson Foods – which recently sold its stake in Beyond Meat – entering the market.
“Just wait until a bigger competitor like maybe Tyson rolls out their fake meat product. They’ll be able to produce it cheaper, they can offer it to consumers at a lower price, so why would the consumer stick with Beyond Meat?” added Strategic Wealth Partner’s Tepper.
Others argue that the wider demand for the industry will not end up being as high as anticipated. Beyond Meat has said that it could capture up to 13% of the meat market – valued at $35bn, using demand for milk alternatives as a benchmark. But DA Davidson analyst Brian Holland argues that alternative milk demand is higher due to regular use by a lactose intolerant population.
“Just wait until a bigger competitor like maybe Tyson rolls out their fake meat product. They’ll be able to produce it cheaper, they can offer it to consumers at a lower price, so why would the consumer stick with Beyond Meat?” - Mark Tepper, president and CEO of Strategic Wealth Partners
"We think there are fewer who have to find a solution to animal meat as compared to milk," he wrote in a note to investors, adding that he also believes only 70% of the retail meat market can be replaced by meat substitutes, lowering the segment’s percentage value even further.
Growth in competition meanwhile means it is near impossible that Beyond Meat would capture the entirety of any such segment, whatever the size.
A word of caution for shorts
Despite all this, a number of analysts do remain bullish on the stock. This includes Barclays, which issued an ‘overweight’ rating for the stock on 18 September with a price target of $185, representing a potential upside of 19%.
Others also caution against short selling the stock, due to the possibility of a McDonald’s-like announcement causing shares to surge: it’s worth noting that short-sellers took a $100m hit on news of the Dunkin’ partnership, with the ‘short squeeze’ effect often causing the stock to surge even higher during such announcements.