Beyond Meat (NASDAQ: BYND)
, a provider of plant-based meat alternatives, surged more than 18% last week, with word of a new Taco Bell menu item accounting for most of the move. After quadrupling between March and October 2020, Beyond Meat lost nearly half its value in three months.
Beyond Meat is a packaged foods company that trades like a hot tech company – in terms of its price action and its multiple. The company is trading at 14x forward sales and nearly 600x forward earnings. But Beyond Meat also has a growth outlook rarely seen outside of tech – revenue is expected to grow by more than 50% for each of the next two years.
The Growth Opportunity is Massive
The global-plant based meat market was estimated at around $4.3 billion in 2020, and is projected to grow at a CAGR of 14% over the next five years, reaching $8.3 billion by 2025.
Young people are going to drive a large percentage of the growth. A Piper Sandler (NYSE: PIPR) teen survey that was conducted in the fall of 2020 shows just how open young people are to meat that doesn’t come from an animal:
- 18% of survey respondents consume plant-based meat.
- Of the 82% that haven’t tried it yet, 65% are not open to trying it and prefer real meat, and the other 35% are open to trying it. That compares favorably to the 20% of US adults that had not tried plant-based meat, but would be open to doing so.
- Beyond Meat was the second-most mentioned brand (33%), behind Impossible Burger (37%), but ahead of Kellogg’s (NYSE: K)Morningstar Farms (22%).
Young people are very environmentally conscious, so their love of plant-based meat shouldn’t come as a shock. Animal agriculture causes 14.5% of global greenhouse emissions, with 65% of those emissions coming from beef and dairy cattle. The Beyond Burger creates 90% less greenhouse gas emissions than a quarter pound of US beef.
The competition is concerning, however, in more ways than one.
It’s not just that Beyond Meat is No. 2 in an important measurement – the preferences of a key demographic – but the fact that plant-based meat alternatives are more expensive than beef. Earlier this month, Impossible Foods cut the price of its Impossible Burger by 15% to around $6.80 a pound, but that’s still more than double the $2 to $3 price for a pound of beef.
Many of the teenagers that are devouring plant-based burgers aren’t shelling out for them – their parents are. Are they going to be willing to open their wallets in 5-10 years? The answer is very important to Beyond Meat’s long-term prospects.
But that assumes that plant-based meat prices will remain high and beef prices will remain low. The beef industry is currently heavily subsidized by the US government, but the new administration will definitely want to reduce greenhouse gas emissions. That could mean cutting those subsidies, or even shifting them to plant-based meat alternatives.
Moreover, the plant-based meat industry hasn’t been around that long. In time, companies like Beyond Meat and Impossible Foods could figure out how to produce plant-based meat in a more cost-effective way.
How Should You Play Beyond Meat?
Beyond Meat does look like the type of company that can see explosive revenue growth for longer than you expect. But it still might not be enough. Big food companies are typically valued at around 2x revenue due to the industry’s low margins. Beyond Meat would need more than $4 billion in sales to trade at that multiple – it recorded just $400 million in sales over the last 12 months.
It’s possible that Beyond Meat will have higher profit margins than traditional food companies when it matures – its ~30% gross margins are encouraging – but that is far from a guarantee.
To get to just $2 billion in annual revenue, Beyond Meat would have to grow revenue at a CAGR of 50% over the next four years. Again, it is projected to do so over the next two years, but expecting BYND to grow revenue by 50% for each of the next four may be too much to ask.
It’s possible that BYND can pull it off. And if it does, BYND could grow even more in the second half of the 2020s. Shares could surge over the next four years in that bull scenario.
But the bear scenario of slowing revenue growth in 2023 or 2024 seems a lot more likely, and makes it risky to buy BYND at current levels.
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