Beyond Meat’s stock surged on its first day as a public company. You could say it was BEYOND expectations. The stock surged 163% in the first day of trading. This was one of the strongest one day performances since the 2000 dot com bubble.
Is Beyond Meat’s Stock… Beyond Sensical?
Beyond Meat’s Valuation is currently is $4 billion based on market cap. Based on my calculation, the company is currently trading at 36.5x 2018 sales. For context, Google trades at 5.0x sales. Tesla is 2.4x sales. I would actually be interested to hear any stocks with higher price / sales multiples that are non-pharma related. Clearly, this is a high multiple.
As an aside, this is actually a poor outcome for the company, all things considered. They could have raised the same amount of money by issuing much less shares if the underwriters had priced it correctly at a higher price. That said, hindsight is 20/20.
But the company IS growing quickly and has noted that it has been capacity constrained. Sales were up 170% in 2018 from 2017 (albeit, only $88MM in sales in 2018 so coming off of a low base). Based on the company’s disclosure, they estimate the total meat market to be $1.4 trillion in size. Clearly, they will not be able to capture the total market here or even come close. What they want investors to say is, “well, if they just get 5% of the market, thats $70BN!”
I don’t think that is going to happen. The product is good, but its not that good. There are also competitors (I’ve personally tried the Impossible Burger and I really like what they’ve done).
When assessing this company’s moat, and taking the ingredient list into consideration, it is hard for me to say over a long period of time no competitor can break in. The ingredient list looks pretty simple to me, so it really comes down to texture. Obviously not an easy task since veggies burgers have been around for at least 30 years, but players are emerging. Again, I’m not being paid by Impossible Burger but it is good stuff!
So is Beyond Meat Stock a Buy?
It seems almost impossible to justify a price to sales multiple like what BYND trades at. That is likely why the underwriters had so much trouble pricing it. But if you take a longer term view, it is actually interesting.
Lets walk through some assumptions:
I am going to assume the company grows 175% in 2019. This is decent deceleration from their Q1’19 pace. The company was able to triple its monthly capacity and its corresponding sales are expected to be up ~290%. Gross margins are also set to improve to ~25-26% of sales, from the 20% area during 2018.
Following 2019, I expect the company to double in 2020, 75% in 2021 (stark deceleration) and 45% in 2022. Once the company has capacity online, its relatively easy to ramp if demand is there and the incremental margins already appear quite strong. I am going to assume they have a 38% incremental gross margins in 2019, stepping up to 40% as they hit the high notes of 2021 and beyond. Long story short, as my snapshot below shows, I have the company reachin 12-13% EBITDA margins by 2022-2023.
The interesting thing is that the business, like most food companies, does not require much capital to grow. Therefore, I have the company FCF positive by 2023. That may not seem that great, but considering the growth, it isn’t too bad.
Why do I think it can even reach $1.5BN in sales? It is a lofty goal, but for one, they really are attacking a huge market. McDonald’s apparently sells 75 hamburgers a second and had franchise wide sales of $86BN in 2018. That’s just McDonalds.
Unfortunately, as shown at the bottom of this snapshot, Beyond Meat’s stock valuation just is not there. It is just way too high. These are optimistic assumptions and by 2023 we’d still be sitting at 20x EBITDA. That seems too rich for my diet.