I’ve been following the “fake meat” space for many years. Even though my primary focus is on tech stocks, I’ve often been able to find non-tech companies benefiting from the high margins and high growth found when innovative products and services are brought to market. And fake meat (or “vegetable protein,” if you prefer) market has seen a lot of innovation recently.
Now, however, with the early May IPO of Beyond Meat (BYND), in my opinion, we at long last have a public, pure-play company ready to exploit this mega-trend. So I recently bought (in a personal account, not in the Crabtree portfolios) 100 shares of BYND.
(For the purposes of this column, I’m going to use the word “meat” to describe both traditional animal-sourced protein as well as the newer vegetable-based forms. I apologize in advance to any readers from Missouri, where “meat” is legally defined as only coming from an animal. LOL.)
Meat Alternatives
I’ve been a fairly adventurous eater throughout my life and my wife and I have tried to pass that along to our kids. So we’ve tried a variety of meat alternatives through the years and have come to include several in our regular diet.
But last year we went out to try the Impossible Burger and…we all knew this was different. It didn’t merely not taste bad. It tasted very good, albeit as the protein in a well-dressed burger. I’ve since had another Impossible, and a couple of Beyond Meat burgers as well. All good. All game-changing.
And then last November, Beyond Meat filed to go public. And I made it known early on to my retail broker, Fidelity, that I was interested in getting shares. Alas, despite Olympic-levels of groveling throughout the Spring, my efforts came to naught. I was shut out.
Impressive Debut
I’ve since learned that Fidelity got virtually no BYND shares to distribute to its vast client base. And that’s quite believable when the IPO priced at $25/share, crossed its first trade at $46, and spent much of its first day trading north of $50.
So even though the stock had more than doubled, I decided to buy some anyway. I admit that buying even a little violates most of my regular investing criteria – like the company having positive operating cash flow.
What reasons could I have to justify investing? Here are five:
- Right now, Beyond Meat is a tech company. It’s exploiting a technological breakthrough to simultaneously take market share from existing protein vendors, and (separately) create a market where none previously existed. As the company benefits from its high-growth, high-margin profile, it probably deserves a high valuation for now.
- In my opinion, the conventional wisdom about the company is wrong. Many prominent investors have opined that ‘Beyond has come up with a better meat substitute.’ This is wrong. Beyond meat isn’t going to displace existing fake meat – a paltry market. Beyond meat (and Impossible meat) is a substitute for real, animal meat – a $1.4 trillion market worldwide.
- Scaling up is deflationary on both the input and output side. Often, when a product or service moves from small production volumes to large, it benefits from economies of scale: per unit costs decline thanks to higher levels of automation and standardization. But this is sometimes offset by greater input costs created by resource demand. When the car replaced the horse and buggy, the additional need for raw materials created temporary scarcities in steel, wood and rubber. But vegetable protein products like those made by Beyond and Impossible require fewer inputs (water, vegetable matter, energy) per unit of output compared with current live-animal processes.
- Valuation is reasonable looking backwards. The total animal meat market (at retail) is currently $1.4 trillion. Does BYND have a chance of capturing 1% ($14 billion) market share in seven years? Possibly. Consider that BYND had $89 million in revenues in 2018, up 170% from 2017. Suppose hypothetically that the company now has a run rate of $120 million and can grow 100% per year for the next seven years. That’s $15.4 billion in annual revenue by the year 2026. As I write this in late May, BYND trades at 52x sales. But if you can see a path to reaching $15.4 billion in sales in 2026, BYND shares are trading at only 0.33x those imagined 2026 sales. And all it has to do is erect more factories and protect its intellectual property.
- Valuation is reasonable looking forward. If a stock maintains its price:sales valuation going forward, then the stock will rise or fall proportional to its sales growth. But even if you account for substantial decay in both BYND’s sales growth rate and valuation multiple, there is, in my opinion, still the possibility of a substantial return. Current annualized revenue growth was 205% in the March 2019 quarter. And the price:sales multiple right now is 52x. If you model a steady deceleration in sales growth down to 30% annually and price:sales valuation down to only 10 in seven years time, BYND’s market cap then will be roughly $107 billion or 23x times its current value, in my opinion.
Big Risks
Of course, there are big risks. In my view, BYRD’s big advantage is the formula for its product. If that is lost or its IP is otherwise compromised, the chance for high-profit growth will be gone. Tyson Foods, until recently a minority shareholder in BYND, will be rolling out its own vegetable protein products before year-end.
Others will likely follow. An adverse regulatory ruling from the Food and Drug Administration could slow sales or stop them entirely. But I’m prepared to shoulder these risks.
Environmentalists like to scare people by using the phrase, “extinction-level event.” Stock jockeys, however, are more fond of “Amazon-level events,” i.e., opportunities to get in early on something big. No one knows, of course, how Beyond Meat or its investors will “fare” going forward. But those possibly “tasty” returns are “delicious” to contemplate. All that is certain is that the wordplay will be fantastic.
Photo Credit: Marco Verch via Flickr Creative Commons
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