Taking a Second Look at Beyond Meat Stock

The highest priority goal for every company has nothing to do with revenues or EBITDA. Regardless of its industry, size, location, or organizational structure, the number one thing a company needs to do is survive. According to McKinsey, that’s becoming increasingly difficult:

In 1935, the life expectancy of an S&P 500 company was 90 years. By 2010, it was 14 years and studies show that it’s getting even shorter. 

Credit: McKinsey & Company

McKinsey then gives a nod to Gartner’s “organizational plasticity” with their own term, “activate agility.” Call it what you will, both terms describe a company that has digitized its processes to maximize efficiency and flexibility using technologies such as robotic process automation (RPA) or no-code platforms. Accelerated technological disruption is what drives the need for flexibility.

Rethinking the Food Chain

Companies that can’t adapt their obsolete business processes to change will get acquired, merge, or go bust. A few years ago, McKinsey boldly predicted that by 2027, 75% of S&P 500 companies will have disappeared. In some cases, entire industries will disappear.

Perhaps the single most disruptive technology we cover is synthetic biology, a field of science where practitioners are mastering the world’s single most powerful technology – nature. Some experts predict that within a decade, the cost of proteins will be 5X cheaper thanks to synbio techniques that allow us to mass-produce cheap proteins using techniques like fermentation. By 2035, alternative proteins could be 10X cheaper than existing animal proteins.

The Demise of Livestock and Dairy

Last year, we sent our MBAs to a far corner of the earth to produce an extensive report on New Zealand’s high-tech dairy industry. The small country is a shining beacon of light in a world where the demand for dairy is plummeting because people are drinking less milk. While the Kiwis can compete globally using technology and their Silver Fern brand, they won’t be able to stop what’s coming.

One of our readers was kind enough to point us to a report put out by a think tank called RethinkX which contains some alarming predictions. The well-researched 78-page Food and Agriculture Report cites more than 200 references while proposing some alarming scenarios.

Middle of the road estimates from RethinkX are that dairy demand will plummet 90% by 2030, but the industry will be bankrupt long before then. Roughly 65% of milk proteins are consumed directly, and the remainder used for ingredients. That 35% will be the first to be replaced which will be enough to bankrupt the dairy industry. As a result, farmland values will collapse by 40% – 80%. This only holds up if alternative proteins can be produced much cheaper than they are today.

The Impact to Retail Investors

Let’s assume that these stark predictions come true and the entire food industry gets turned inside out. Suddenly, farmland as an alternative asset class doesn’t look so hot. The same goes for the entire agtech industry, synbio stuff aside. Even some dividend champions would be impacted like Archer Daniel Midlands (ADM), one of our core holdings, which is in the business of transporting food. Some might benefit, like McDonald’s (MCD), which should see food costs plummet when they start to produce their own McProteins. Perhaps a good hedge might be to go long meat alternatives.

The most obvious way to benefit from the demise of the food industry is by going long one of the only pure-play stocks out there to address this theme – Beyond Meat (BYND).

Since the Beyond Meat IPO

It’s coming up on two years since the Beyond Meat initial public offering (IPO) which MarketWatch called “the best-performing public offering by a major U.S. company in almost two decades.” The May 2019 IPO priced at $25, but shares opened at $46 and closed at over $66 per share. Just over three months later, shares hit an all-time high of nearly $235 per share, an increase of +840%. Less than one year later, shares had lost -80% of their value, down almost $48 per share. Today, shares of Beyond Meat trade at $142.

As long-term investors, we care very little about short-term price movements. However, we present this data to show just how volatile this stock is. If we plan to accumulate a position in BYND and hold for the long term, we’ll have to use dollar-cost-averaging to smooth out this volatility. Before that, we need to decide if this is a stock we want to hold.

To Beyond or Not to Beyond

Beyond Meat has developed three core plant-based product platforms that align with the largest meat categories globally: beef, pork, and poultry.  (The Beyond Burger accounted for approximately 64% of their gross revenues in 2019.) While other companies use technologies like synthetic biology to “grow” meat, Beyond Meat builds meat directly from plants using textured soy proteins, a task that animals were previously responsible for. Sales growth for plant-based meat products has soared, with Beyond Meat clearing nearly $300 million in revenues for 2019.

We’ve largely considered “the Rona” to be a temporary investment theme. We’re not interested in the vaccine thesis or the test-kit-provider thesis. Likewise, we see the negative effects of the pandemic on stocks as a buying opportunity. What we didn’t expect was that companies like Beyond Meat realized triple-digit growth when the demand for plant-based meats went through the roof as substitutes became unavailable.

As a result of this increased demand, revenue growth for Beyond Meat continues to climb. For the first half of 2020, revenues had nearly doubled compared to the same time frame in 2019.

The above table shows how Beyond Meat plans to segment their revenues. Surprisingly, nearly one-fifth of their revenues are now international and they recently opened a manufacturing facility in the Netherlands. Heavy R&D spending relative to other food companies underscores the statement that innovation is their competitive advantage. In regards to pricing, Beyond Meat hopes to achieve price parity with animal-based meat in at least one of their product categories by 2024.

Bringing COGS Down

RethinkX’s predictions require that the cost to produce meatless-meats falls dramatically until it’s a fraction of what real meat costs. Sure, the product may taste great and look great, but the meat industry only becomes threatened if substitutes can be priced at the same cost or less. If there’s a recession, people may not pay $5 for two plant-based burgers, but they may pay $2 for five.

A key metric for us would be the cost at which Beyond Meat can make their pea-based meat. If we divide the total pounds of meat produced (51,372,000) by the cost of goods sold ($198,141,000), we get $3.85 a pound which seems about right.

While Beyond Meat may not be utilizing synbio now, down the road they may look to consolidate the space a bit by picking up any number of the many startups dabbling in alternative proteins. With distribution channels already in place, it’s easy to add breadth to their product offering through bolt-on acquisitions.

Beyond Meat’s ability to expand internationally shows a level of maturity which should be attractive to other alternative protein developers who want access to overseas markets. If Beyond Meat can’t bring the cost down without synthetic biology, they’ll need to add those capabilities. Being a publicly-traded stock should make it easier to facilitate growth through acquisitions. As for now, there seems to be no end to the sales growth, and that’s reflected in a share price that’s appreciated +468% in seventeen months compared to a Nasdaq return of +38% over the same time frame.

How Expensive is Beyond Meat Stock?

Trying to value stocks is a painful exercise they teach you in business school. Everyone gets into groups, and then each group values the same company. Then, everyone marvels at just how vastly different everyone valued the same company. We prefer the KISS method.

First, we found two companies that provide pure-play exposure to one of the cheapest protein sources you’ll find in the meat counter – chicken. Sanderson Farms (SAFM) and Pilgrim’s Pride (PPC) are the second and third largest poultry producers in the United States. The chart below on the left shows how Beyond Meats is bigger than both these two companies combined when it comes to market capitalization.

Furthermore, the chart above on the right shows how SAFM and PPC saw combined revenues of $14.6 billion in 2019 compared to Beyond Meat at $300 million. In order to catch up, Beyond Meat would need to grow revenues at a compound annual growth rate (CAGR) of 50% over the next 15 years. The point to be made here is less about valuation, and more about showing just how much growth needs to happen before alternative proteins start to present formidable competition for meat producers.

From Avoiding to Liking

Since Beyond Meat’s IPO, we’ve been avoiding the stock because it’s being hyped by the Robinhood trader types right alongside SPACs and cannabis stocks. Now that the dust has settled following the IPO, we’re liking Beyond Meat’s value proposition, and maybe even considering accumulating a position very slowly and cautiously over time. With the addition of Beyond Meat, the Nanalyze Disruptive Tech Portfolio would have 24 stocks, so we would target a weighting for BYND of 4.2%. We would then purchase a fraction of our position each month on a fixed day, something that’s called dollar-cost-averaging. Should shares test new lows again, we’ll buy the dip.

It’s important to note how small a fraction we would be investing in a single stock which significantly lowers the risk. When it’s finally vested, the final weighting for BYND stock will be less than 5% of our entire tech portfolio, and less than 2% of our entire equities exposure.

Conclusion

The alternative protein investment thesis is expected to be extremely lucrative if manufacturers like Beyond Meat can drive their prices down to compete with real meat, or even undercut it. We may put some skin in the game just so we’re forced to more closely follow this story.

Beyond Meat isn’t the only stock with exposure to alternative protein producers. There’s also a small stock across the pond in England that’s invested in multiple food tech startups. It’s all spelled out in “The Nanalyze Disruptive Tech Portfolio Report,” now available for all Nanalyze Premium annual subscribers.