On its face, Beyond Meat (NASDAQ:BYND) stock seems like an attractive pick. I’m a big proponent of investing in hypergrowth trends — and Beyond Meat is a play on the fast-growing plant-based meat market. Shares have become cheaper amid a market-wide selloff I expect to reverse at some point.
But looking closer, BYND stock has significant concerns that investors can’t ignore. I’m somewhat skeptical toward the long-term health of an industry whose products aren’t, well, healthy. Competition is intense and getting more so by the day.
Even Beyond Meat’s fourth-quarter earnings report, which showed impressive revenue growth, actually highlights potential challenges. I was skeptical toward Beyond Meat stock over $100 before that earnings report. At $95 after the release, I’m not compelled to change my mind.
The Case for Beyond Meat Stock
BYND bulls can point to earnings as buttressing their case. Fourth-quarter sales rose a staggering 212% year-over-year. That closed a full year in which revenue more than doubled.
Meanwhile, guidance for 2020 suggests revenue should grow another 65%-70%. CEO Ethan Brown noted on the call that the outlook doesn’t include potential new wins, either.
There are some opportunities. Beyond Meat is continuing a trial with McDonald’s (NYSE:MCD) in Canada, and a larger partnership could drive huge growth on its own. Rival Impossible Foods has benefited greatly from sales through Restaurant Brands International (NYSE:QSR) unit, and McDonald’s rival, Burger King. Beyond Meat is aiming to expand in China as well.
Guidance for adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margins above 8% looks solid as well. It suggests Beyond Meat should be profitable this year in terms of adjusted net income.
There’s not much margin improvement expected this year, but Beyond Meat is investing in marketing, research and development, and other areas.
Those investments are depressing near-term earnings — but will help drive long-term growth. And that strategy has worked over and over in this bull market.
Whether it’s Beyond Meat, Amazon (NASDAQ:AMZN) or Square (NYSE:SQ), investors have rewarded companies that trade near-term profits for long-term growth — and for good reason. Companies with massive opportunities ahead should take the long view. So should investors.
If they do, BYND might look attractive, at least on a relative basis. Its revenue growth rate is among the highest in the market. Yet with the stock at about 13 times 2020 revenue excluding net cash, its valuation is not.
The Gross Margin Concern
I’d point to a key fundamental concern: gross margin. Beyond Meat is guiding for gross margins in 2020 of 33%-35%.
That figure appears to have disappointed Wall Street. But that’s not really the issue. The problem is that Beyond Meat’s margins aren’t like those of other high-flying growth stocks.
Shopify (NYSE:SHOP), for instance, posted adjusted gross margins in 2019 near 56%. Square is at 40%. Amazon is above that mark. Software-as-a-service plays often see figures north of 70%.
To be sure, Beyond Meat’s gross margins aren’t necessarily surprising. It’s a food manufacturer, not a software provider. But they’re problematic just the same, particularly in the context of its industry.
After all, competition is intense, which generally limits pricing power. Making matters worse, Impossible Foods just cut its prices by 15% on average. Beyond Meat may have to keep up.
At the same time, the company can’t cut back on marketing spending when new competitors arrive seemingly every month. The most recent is privately held giant Cargill, who plans to focus on the food service category.
So it’s true that sales are growing at an impressive clip. But the question is how fast profits will go. At the very least, it seems like there’s going to be a ceiling on Beyond Meat’s margins that doesn’t exist for other dearly valued names. That’s a problem.
The Long-Term View
It’s a problem because the growth of Beyond Meat’s market isn’t necessarily assured. And so if Beyond Meat does deliver the revenue growth bulls expect, profit growth still may lag. If its sales disappoint, BYND stock plunges.
I’m personally not convinced about the “fake meat” market as a whole. I’ve tried the products. I’m not sure I’d eat them again. Beyond Meat and the industry need customers like myself to become consistent buyers. I don’t know that they will.
It’s not just a matter of taste. Fake meat is not particularly healthy. It’s heavily processed and generally contains somewhat high levels of fat and sodium.
It’s true the category is growing at an impressive clip at the moment. But much of that growth is coming from first-time customers, many of whom will not become second-time customers. As I wrote last month, we’ve seen first movers in categories like gluten-free, organic food and sparkling water post enormous growth and huge gains in share prices. Many of those stocks wound up plunging.
From a broad standpoint, I don’t see fake meat as the megatrend some bulls believe it to be. It’s closer to a fad, even if I do believe the category will drive some growth over time.
The problem for BYND, with a valuation just under $6 billion, is that “some growth” isn’t enough. Not when competitors are entering the market en masse, and not when gross margins are below 35% with pricing pressure on the way. I’m willing to pay for the best growth stories, but I simply don’t believe the Beyond Meat story is at that level.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.