Is Beyond Meat Stock a buy?
Ask almost any Wall Street analyst, and they’ll tell you Beyond meat (NASDAQ: BYND) the stock is overvalued. Of the analysts tracked by TipRanks, only one looks like Beyond Meat is a buy right now, but this analyst’s price target is within 10% of where the stock is currently trading. Therefore, even the lone bull looks like the near term upside is limited today.
The Beyond Meat bears make fair arguments against the stock that shouldn’t be ignored. But I believe they are overlooking important parts of this investment story.
The case for not buy Beyond Meat stocks
Beyond Meat makes plant-based meat substitutes. Many consumers believe it can help mitigate climate change, and some believe plant protein is a healthier way to eat because it lowers cholesterol intake, among other things. The company estimates the global animal protein industry at $ 1.4 trillion, so there are many benefits as plant-based meat substitutes gain in popularity.
But this trend is still young. Generally speaking, trends at an early stage can suddenly take new directions, working against companies with an early lead. For example, consider Singapore just approved cultured meat, which differs from plant-based meat in that it is grown from real animal cells in a laboratory. The cost of cultured meat is still sky-high, reducing the immediate threat to Beyond Meat. But it does illustrate how the industry could fundamentally move away from Beyond Meat products over time.
There is another problem. Amazon Founder Jeff Bezos once said, “Your margin is my opportunity,” illustrating how some companies lower prices to gain market share. And many analysts see a price war brewing for plant players. Beyond Meat rival Impossible Foods has already slashed prices by 20%. And with the growth of the alternative meat market, more companies than ever are starting up, threatening to trivialize the space. If Beyond Meat responds with its own price cuts, it can do so at the expense of profits.
Finally, the Beyond Meat stock is not a bargain at these levels by any stretch of the imagination. Stocks trade around 25 times trailing sales and over 1,000 times long term earnings estimates. Investors clearly expect robust and profitable long-term growth if they are prepared to pay such a high price. But the aforementioned factors challenge this optimism.
The case for buying Beyond Meat stocks anyway
Management does not hide its desire to lower prices; it intends to lower the price of at least one product below the price of animal protein by 2024. When you lower prices, gross margins suffer, unless you proportionately reduce your cost of production. Many analysts overlook the company’s progress in reducing the cost of goods sold. Consider how well gross margins have resisted Beyond Meat’s price drops to date.
As the graph shows, Beyond Meat’s gross margin increased through 2020, but this recent success is not due to the company’s declining prices. When COVID-19 closed restaurants, products intended for its restaurant partners had to be repackaged for grocery stores; some products have even been thrown away. And the company incurred additional labor expenses to reroute various items. Therefore, this margin change is temporary.
Speaking to CFO Mark Nelson about the undervaluation of animal protein by 2024, CEO Ethan Brown said, “I promised him that I would not hit this target at the expense of his margin.” Beyond Meat plans to lower the prices because it lowers the cost of manufacture.
With less than $ 0.5 billion in revenue over the past 12 months, Beyond Meat has ample opportunity to increase its long-term sales in the meat industry by $ 1.4 trillion. And there are potential catalysts on the rise in the coming years, including new products, new partner restaurants, and even the possibility of entering new product categories. For example, plant-based chicken substitutes are still not commercially available. And imagine Beyond Meat’s prices falling below animal protein. Sales could increase when cost is no longer a barrier.
This stock requires a certain risk tolerance
I’m not going to tell you that Beyond Meat is not a risky investment; It is. Therefore, it is up to you to consider whether your portfolio can handle a riskier security. If you have a low tolerance for risk, or if you are already over-invested in riskier assets, you may need stocks that are safer than Beyond Meat.
But if you’re willing to take a little risk, Beyond Meat is a buy stock, in my opinion. Just be prepared to go on for a very long time; I guess it could take five to 10 years to play out in a big way. Since time is on your side, there is no need to rush into a position. This could be a great move to use average dollar costs, investing small amounts at regular intervals to smooth volatility.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.