Why Beyond Meat’s Stock Looks Expensive At $132?

Beyond Meat stock (NASDAQ: BYND) lost over 58% of its value – dropping from $129 in January 2020 to $54 in March 2020. This was due to the Covid-19 outbreak and the resultant lockdown, which led to expectations of economic slowdown, and consumer demand plunged. However, the multi-billion-dollar Fed stimulus provided a floor to the stock price as it rebounded from April onward and currently stands at $132 per share. With the stock almost 75% above its level at the beginning of 2020, is the market too exuberant or is the price rise warranted? We believe that the stock price has risen beyond its potential and will likely decline from here.

Where Is BYND Stock Headed In The Next Few Months?

Trefis estimates Beyond Meat valuation to be around $110, reflecting a potential decline of about 17% from its current level. The trigger is the expected hit of close to $70 million that Beyond Meat is likely to take to its incremental revenues in 2020. We expect Beyond Meat’s revenues to come in at $455 million in 2020, about $70 million lower than our previous estimate of $525 million. This marks a y-o-y revenue growth of 53% compared to the 76% projected before the current crisis hit the world. The decrease in the revenue projection is mainly due to the ongoing lockdown, leading to the shutting down of restaurants and many retail stores. Increase in partial employment has decreased consumer spending, thus affecting demand for BYND’s products.

This was evident from the recently released Q2 results of the company where the impact of the pandemic was palpable. Though Beyond Meat’s revenues increased by 68% y-o-y, the entire growth came only from the retail division. The company’s restaurant segment – which has been the fastest growing segment for Beyond Meat over recent years and in fact surpassed retail as the biggest revenue contributor in 2019 – saw its revenue decline by 58% y-o-y in Q2 2020. Though the company’s net income margin improved slightly in Q2 2020 on y-o-y basis, this was mainly due to one-time charges in the year ago period. Performance in Q2 2020 has in fact deteriorated as is evident from the decline in gross margin from 33.8% in Q2 2019 to 29.7% in Q2 2020. Also, BYND reported an operating loss of $8.2 million in Q2 2020 as against an operating profit of $2.2 million in Q2 2019. Deterioration in profitability was driven by costs related to product repacking activities due to Covid, increased headcount, higher share-based compensation, increased marketing expenses, and R&D cost.

BYND experienced a meaningful slowdown in its food service business as various regions around the world implemented stay-at-home orders, resulting in the closure or limited operations of many of its food service customers. Though recently there have been signs of reopening of the economy and lifting of lockdowns which led to a surge in stock price, most food service customers are operating under various local restrictions and continue to navigate a highly uncertain environment. Also, the recent surge in Covid positive cases in the US could prove to be an impediment in the path of the company’s healthy growth, as re-imposition of lockdowns will lead to a further decrease in the revenue growth outlook. Amidst this uncertainty, the management has suspended its previous full year outlook. Another Covid wave and lockdown could put Beyond Meat’s strategic initiatives at risk. The company has focused on growing its restaurant and food service business by recently entering into partnerships with Dunkin’ Donuts and McDonald’s. These restaurant chains operating partially (with only take home services allowed right now) for a prolonged period would mean Beyond Meat’s near-term strategy going awry and not getting the desired results.

For the full year 2020, total revenue is expected to be $455 million but the company is expected to again report losses despite operations turning profitable for the first time in 2019. Once lockdowns are lifted, revenue is expected to rise to $680 million in FY2021 but the increase in shares outstanding is expected to limit the growth in revenue per share (RPS) which is expected to rise to close to $11 in 2021 from $7 currently. With the near-term outlook remaining uncertain, healthy revenue and margin growth coming in only once the Covid tide subsides and lockdowns are lifted, and with the effect of the company’s strategic initiatives not expected to be felt anytime soon, the company’s P/S multiple could see a 50% decline from the current 20x to about 10x. RPS of $11 and P/S multiple of 10x suggests that Beyond Meat’s stock could drop to $110 in the near term, reflecting a potential downside of around 17% from its current level.

See how Beyond Meat’s P/S valuation multiple stands in comparison to its peers Tyson Foods and Kellogg.

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