Beyond Meat: Not Attractive Despite Massive Slide

Beyond Meat (BYND) was a market favorite after its 2019 IPO. The problem is that Beyond isn’t becoming a consumer favorite. Sales growth has slowed down, and the gross margin has shrunk while burning cash.

Macro-events are against BYND; interest rates and pea protein prices are rising. BYND is facing too much risk in the short term with questionable long-term rewards. I consider BYND a Sell.

Fragile Operations

Revenue growth has been slowing. 2021 saw only 14% revenue growth compared to 37% and 239% for 2020 and 2019, respectively. BYND likes to tout it is disrupting the $1.4 trillion meat market, but if sales growth has already slowed to 14%, it is hard to see how this is disruptive. 

On the bright side, BYND is seeing higher total volume sold. BYND sold 16.6% more pounds of products in 2021 compared to 2020. The lower sales growth in dollars is due to a lower price per pound that products are being sold at as well as trade discounts being applied.

In the primary U.S. market, food service is experiencing growth while retail shrunk. The U.S. market has overall stagnated in revenue growth, meaning all sales growth can be attributed to international markets. 

As well, U.S. consumer preferences are shifting away from Retail and going into the Foodservice segment. The U.S. market had BYND products first; the international markets will most likely slow as well once the initial taste test is done.

According to BYND, its gross margins decreased to 25.2% for the full year from 30.1% the year earlier. The cost of goods sold went up 22.1%, partially attributed to COVID-19, which caused $12.5 million in write-offs and $0.8 million in write-downs.

On a per-pound basis, the cost of goods sold went up 4.7%, explaining the majority of the growth margin decrease. Even without COVID-19, costs would have risen by 1%, resulting in a 27.9% gross margin. 

The cost of goods sold could explode soon due to a poor pea harvest and increased demand. Pea protein is the primary ingredient in BYND’s products. Pea protein price could increase as much as 120%, which would devastate BYND. A higher pea protein price is almost guaranteed; the only remaining question is, how high will it go?

As one would expect a growth-oriented company to do, BYND has increased research and development substantially by 112.3%. Operationally increasing research and development makes sense, but it also puts additional financial pressure to perform in the short term. 

BYND is seeing increased competition. Both dedicated plant-based companies like Impossible Foods and more traditional companies like Kellogg are increasing vegan alternatives. Increasing competition will likely lower BYND’s market share. 

The Incoming Cash Problem

BYND issued $1.15 billion of debt in Q1 2021 to infuse much-needed cash. The problem is that BYND is still operationally cash negative. BYND’s Q4 2021 had an operating cash outflow of $110.3 million, and the full year had an operating cash outflow of $301.4 million. These outflows are before any investments, which further reduced cash by $147.5 million for the year. 

As of year-end, BYND holds $733.3 million cash and equivalents. Assuming the level of cash outflows remains the same as 2021, BYND has until Q2 2023 before cash reserves run out once again. At this point, BYND will need to raise additional cash through equity or more debt.

BYND’s shares were initially priced at $25 but ended their first day of trading at over $65. The market was enthusiastic about the listing, leading to a peak price of over $222. The market is no longer enthusiastic, having dropped over 40% year-to-date. 

If BYND’s price does not recover, any issuance of equity to raise capital will cause significant dilution. BYND has 63.4 million shares issued. To raise another $1 billion, 25 million shares would need to be issued at $40. Issuing these shares would dilute equity by 39%. 

Debt is the more likely option when the share price is so diminished. The macro-environment of raising interest rates is also against BYND; many analysts expect 2% rates by the end of 2022. On top of the risk-free rate, BYND will likely need to pay a higher premium due to already holding the previously issued debt. 

Wall Street’s Take

Turning to Wall Street, BYND earns a Hold rating based on one Buy, eight Holds, and three Sell ratings assigned during the past three months. 

The average Beyond Meat stock price target of $51.90 implies 34.4% upside potential.

Concluding Thoughts

BYND was pitched as a disrupter, but it is not disrupting. 2021’s slowing growth and diminished margins are a sign of prolonged weakness. The cash buffer from previously raised debt is diminishing fast, and BYND will be leveraged or diluted most likely next year. I am more bearish than the analyst consensus; I believe BYND is a Sell.

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