Year-to-date, Beyond Meat (NASDAQ:BYND) stock is up an eye-popping 54%. Yet that BYND share price is still more than 50% below its all-time high of $239.71 seen on July 26, 2019, leaving many investors wondering if now maybe a good time to buy into the shares.
As the California-headquartered company is scheduled to report earnings later this month, I expect increased volatility in the coming days, possibly with a downward bias in BYND stock. Long-term investors may regard a dip below $100 and especially toward the $80 level as opportunity to get long in the shares.
What to Expect from Beyond Meat’s Q4 Earnings
The plant-based meat substitute company topped estimates and reported its first quarterly profit with its Q3 earnings in October. Revenue of $92 million was better than the estimated $82.2 million. Earnings per share also came at 6 cents vs. the 3 cents expected.
As for the revenue streams, Beyond has two main segments: Gross Fresh Platform (over 95% of revenue) and Gross Frozen Platform (about 5% of revenue). Restaurant and foodservice accounts for about 45% of sales, while retail makes up the other 55%. Management highlighted that sales grew across both customer segment.
Analysts would like to see that the positive Q3 trends continued into the year’s final period.
Although the group raised revenue outlook for the year from about $240 million to a range of $265 million-$275 million, BYND stock dropped from about $108 to a low of about $71 in a matter of weeks following the earnings report. However, since then the share price has recovered and is currently hovering around $117.
Recent research led by Christopher Gardner of Stanford University discusses the protein-consuming habits of Americans, including various drawbacks and ways to eat better. Both nationwide and globally, the debate on the effect of animal meat on environmental, health, and ethical concerns is indeed increasing.
Many scientists and analysts agree that discourse around reduced consumption of animal-based meat is likely to gather pace in this new decade. And the number of people switching to or at least trying meatless, plant-based protein foods will likely increase. Therefore, Beyond Meat is possibly at the right place at the right time.
Companies like beyond meat offer products that “approximate certain aesthetic qualities, such as texture, flavor, and color, and nutritional characteristics of specific types of meat.”
Q3 earnings showed that the group is working to increase its restaurant partnerships, including McDonald’s (NYSE:MCD) and Yum! Brands’ (NYSE:YUM) KFC unit. Management has also expressed interest to expand internationally, including China.
However, the maker of plant-based burgers is also facing increased competition from traditional food companies as well as new entrants into the industry. For example, products by privately owned Impossible Foods is getting consumers’ attention.
Furthermore, in January, Restaurant Brands International’s (NYSE:QSR) Tim Hortons said that the group would not offer Beyond Meat products any more. In other words, the meatless segment within the industry will draw in more companies with a wide range of plant-based food offerings. And the increased competition is likely to compress the margins of BYND stock and affect its valuation levels.
What Could Derail BYND Stock?
Valuation: Successful investing requires discipline. Therefore, I cannot advocate buying shares of companies at expensive valuations without doing extensive due diligence. Currently BYND stock trades at a forward P/E ratio of about 285, expensive by any standard.
Another metric I pay attention to is the stocks’s price-to-sales (P/S) ratio, which stands at about 26x. To put the metric into perspective, the S&P 500 index average price-sales ratio is 2.3x.
The company can possibly still persist for several quarters in holding expensive valuation ratios well above S&P 500 or industry averages. For example, we have recently experienced such high valuations in many cannabis stocks in the past few years. However, then 2019 saw the bubble burst in most marijuana shares.
In other words, if the company cannot keep up with the current aggressive growth assumptions, then shareholders may become more concerned about these rich valuation levels and the stock price could easily suffer.
Profit-taking: If you are an investor who also pays attention to short-term technical charts, you may be interested to know that the short-term analysis is urging investors to exercise caution. While long-term investors would like to see BYND stock go over the $125 level, traders are likely to keep the range between $90 and $110.
Therefore, based on your own risk/return profile, you may want to review your BYND stock holding and take some money off the table. Alternatively if you are experienced in hedging with options, you may consider initiating a covered call or protective put position.
Finally, if you believe that you’d be able to ride out any short-term potential decline in the share price, then you may decide to do nothing at this point.
The Bottom Line
Q4 results from Beyond Meat should give a better indication as to whether the manufacturer will be able to satisfy investor risk appetite in the months ahead. It is important to remember that the company operates in a niche segment within the food industry. Therefore, beyond the initial hype most investors will eventually judge the company by the industry’s average valuation metrics.
Although I believe management will successfully take the necessary steps to grow the company profitably in the long run, I do not think the stock will repeat its recent exponential up-move in the next few weeks.
This is a momentum stock. Therefore, investors should expect increased volatility around the earnings report date. Unless the group reports extremely strong numbers, we may have a repeat of the price action following the Q3 results, whereby Beyond Meat stock price initially decreases as many investors decide to take profits.
Yet within three or four years, investors who buy the shares on the dips are likely to be rewarded handsomely. In the meantime, Beyond Meat may also find itself in the middle of a bidding war from various competitors to be acquired.
As of this writing, the author did not hold a position in any of the aforementioned securities.