Beyond Meat Stock is a purchase … If fake meat is not a fad

<p>There are many investors who believe that fake meat producer Beyond Meat (NASDAQ: BYND) is something close to a bubble. It does not take a long look at the Beyond Meat stock to support that view.

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After all, Beyond Meat was actually a bubble last year, going from a $ 25 IPO to nearly $ 240 in three months. Even after a recent withdrawal, it still looks overvalued.

Based on the midpoint of the 2020 guidance, equities are traded at approximately 11x revenue and approximately 125x adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). Admittedly, these multiples are not in line with growth stocks at present.

But this is a food manufacturer with 2020 gross margins in the range of 33-35%. It is not a software developer that drives recurring revenue with gross margins over 70%. At the same time, competition remains intense. Pricing is on its way. It seems pretty easy to make the bear fall, even with the Beyond Meat stock down 29% during the last thirteen trading sessions.

I’m skeptical, but it’s pretty simple. In fact, the potential of Beyond Meats suggests that the stock may actually be cheap right now. Yes, shares are still up almost 260% from last year’s IPO. The basics in the short term look overvalued and perhaps bubbling. However, take the long view, and the stock can easily grow into its valuation … as long as the market continues to grow.

Valuation is not crazy

Even in a market that is far from its peaks, there are growth stocks out there that are difficult to create a reasonably basic fall, even if one assumes years of growth in the future. Shopify (NYSE: SHOP) and Tesla (NASDAQ: TSLA) will keep in mind, and both have seen valuation issues recur in recent sessions.

This does not mean that bears are necessarily correct, or that there is no basic case for any of the names. Rather, it is difficult to get the numbers to work for a warehouse like Shopify that still trades at 27x revenue, or for a carmaker like Tesla with 50x futures revenue (provided these estimates are correct).

Again, on its face, Beyond Meat seems like a similar game. But, truth be told, it’s not hard to support the current price around $ 90. Revenue should come in at around $ 500 million by 2020, based on guidance, and increase well over 60% compared to the year before. EBITDA margins are focused on the mid-8% range, partly due to investments in marketing and research and development.

It does not seem so unlikely that Beyond Meat can get sales over 1 billion dollars, with 2022 a reasonable target. That would require a compound annual growth rate of around 41% over two years – a slowdown from the expected plus percentage of 60% by 2020. Move EBITDA margins to the low double digits and the Beyond Meat stock is now trading at around 50x 2022 EBITDA or less and in the range of 5x revenue.

To be sure, none of them are necessarily cheap. Even the largest manufacturers of processed foods such as General Mills (NYSE: GIS) and JM Smucker (NYSE: SJM) trade below 3x revenue and below 20x EBITDA. But these companies are mature and have low growth. Beyond Meat is neither and will not be 2022.

How beyond the meat layer continues to rise

Again, this is not to say that the stock is an obvious theft. Rather, it is only to say that there is a basic way up here. The company has estimated its addressable market at $ 35 billion simply in the US Take up to 10% of it, assume 15% EBITDA margins, and Beyond Meat is likely to double. (This assumes a 20x EBITDA multiple and a 30-35x multiple earnings per share that would likely be within the $ 6 range.)

To be sure, it would take several years, and there are stumbles across the board. These margins can be a touch high in an industry that can be “commodified”. Privately owned Impossible Foods recently lowered its prices by 15%, and Beyond Meat will probably be forced to match. Competition in the food channel is increasing from Maple Leaf Foods (OTCMKTS: MLFNF) Lightlife, as well as Tyson Foods (NYSE: TSN) and Kellogg (NYSE: K), and eventually also private label producers. Giant Sysco (NYSE: SYY) goes after the food service channel.

These rivals can take shares, but in the meantime they can also squeeze prices and thus profit margins.

That said, there is room for Beyond Meat to get well over 15%. Margins expanded 30 full points just between 2018 and 2019 when the company turned to an EBITDA result from a loss. Higher sales will lead to more efficient production and lower pea protein costs. Beyond Meat can respond to lower pricing over time via lower sales costs and leverage effects – as long as revenue grows.

And that revenues will grow as long as the market for counterfeit meat does the same. But it is not guaranteed. We have seen trends such as organic and gluten-free fizzle out to at least some extent. Both categories still exist, but they have not really been the game changers that some investors thought they would be. Even the Whole Foods Market sold to Amazon (NASDAQ: AMZN) in 2017 at a price well below the 2015 peaks.

Some investors may worry that history will repeat itself. Although I see Beyond Meat as exciting under $ 100, as I did last year, I can not blame them. But that makes Beyond Meat stock pretty easy. An investor who believes in plant-based meat should own this stock, because even up to 260% from the IPO, the category growth is likely to lead upwards.

After spending time at a retail broker, Vince Martin has been covering the financial industry for almost a decade for and other stores. At the time of writing, he had no position in any of the above-mentioned securities.

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