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Is Beyond Meat’s share price overcooked?

Beyond Meat’s [BYND] blockbuster debut on the Nasdaq on 2 May this year marked a big turning point for the burgeoning alternative food sector. 

The company's share price is trading up more than 130% from its first day close of $65.75, making it this year’s best-performing IPO in the US so far – and that hasn’t gone unnoticed. 

Founded two years after Beyond Meat in 2011, Impossible Foods – backed by Microsoft [MSFT] founder Bill Gates but not yet publicly traded – is making big strides in the market and poses a long-term risk to Beyond Meat. 

While both produce meatless burgers, Beyond Meat’s strategy has been more focused on targeting supermarkets, while Impossible Foods has taken to social media and celebrity chefs to drive attention.   

However, both have recently taken aim at the restaurant space as they look to secure their place at the forefront of the sustainable meat movement.

 

Market share at risk from scaled competitors

In the last few months, Impossible Foods has partnered with large restaurant chains like Red Robin, White Castle and Burger King – a subsidiary of Restaurant Brands International [QSR]

But Impossible Foods, as well as private peers such as Before the Butcher and Moving Mountains, will have to get in line. Beyond Meat’s aggressive expansion plans have given it the lion’s share of restaurant accounts with its plant-based burgers featuring in Tim Hortons, Del Taco, Chanticleer and Famous Dave’s [DAVE].  

But not everyone’s hungry for Beyond Meat, as a number of large chains have declined to use its products, including Yum! Brands [YUM] and Shake Shack [SHAK].

In an effort to not get left behind and secure their place at the table, restaurant incumbents such as Conagra [CAG], Tyson Foods [TSN] and Nestle [NESN], along with Yum! Brands are working on adding faux meat (just not necessarily Beyond Meat products) to their menus too. 

In fact, Kellogg’s [K], the American multinational food manufacturer, has been in the fake meat market since the 1970s, with its Morningstar Farms subsidiary.

 

An overpriced meal  

Despite being first to the market, Beyond Meat shares may not continue to outperform to the same degree they have in recent months.

The stock reached an all-time high of $169.96 on 17 June, giving it an impressive market value of $10.22bn, but analysts are growing sceptical in the wake of its rapid run, and have turned from bullish to neutral with a majority advising a hold rating, according to data from Reuters.

 

Market cap$9.51bn
Forward P/E3,163.40
EPS (TTM)-4.68
Quarterly Revenue Growth (YoY)214.70%

Beyond Meat share price vitals, Yahoo finance, 08 July 2019

 

While Jefferies analyst Kevin Grundy believes Beyond Meat is “one of the best stories in [consumer] staples”, he suggests waiting for a pullback before buying the stock due to the competitive environment, which he believes is likely to intensify.  

Grundy currently has a hold rating on the stock with a price target of $105.00, suggesting a fall of more than 30% from current levels, emphasising the stock’s lofty valuation in a recent research note. 

The growing amount of analysts agreeing that the stock is overvalued has attracted a slew of short sellers with 5.43 million shares shorted, representing more than 46% of Beyond Meat’s float, according to data from financial and analytics firm S3 Partners.

 

A budding growth stock 

Despite the downside risks of intensifying competition and a sky-high valuation, there’s no denying the revenue potential of this booming sector – even if there are diverging projections. 

Analysts at Barclays expect the alternative meat market to grow from less than $14bn in 2019 to reach a massive $140bn over the next decade, whereas analysts at Bernstein expect it to be worth just $40.5bn by then. 

$140bn

Barclays' estimated value of the alternative meat market in 10 years

Bernstein wrote in a note that if Beyond Meat were to secure 5% of the market, up from 2% today, this would imply sales of $2bn by 2028. Beyond Meat’s sales in 2018 were $88m and in 2019 it expects annual revenues to more than double to $210m.
 
The company’s most recent Q1 results revealed net revenues had more than tripled from the same quarter a year ago, rising 215% to $40.2m, primarily driven by an increase in sales of its flagship product – The Beyond Burger. 

The earnings beat far exceeded analysts’ expectations and highlighted healthy revenue growth potential to investors.  

“We are very pleased with our successful IPO during the month of May and our strong first quarter financial results we believe demonstrate mainstream consumers’ desire for plant-based meat products in the US and internationally,” CEO Ethan Brown said.

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