Beyond Meat Could Be Beyond Its Fair Value

The IPO Trade

Beyond Meat (NASDAQ:BYND) is one of the biggest IPO success stories of 2019, that ground floor investors love to see. The IPO price of BYND was $25 a share and the trade opened to the public at $46 a share (84% increase) and now, 6 trading days later, the stock is trading at a high of $85 with a $5 billion market cap, 240% increase from its IPO price.

Considering that this stock is a recent IPO, it is prone to high volatility as the market attempts to determine where the fair value lies. Just today this stock saw a 17.5% swing from the morning high of $85.00 to this afternoon low of $72.25. I believe that BYND has a lot of room to slide. Currently trading above 50x trailing price-to-sales, this stock has rallied not just beyond meat but beyond its fair value.

Other Recent IPO Performances

On the whole, the market has responded positively to recent IPOs. Pinterest (NYSE:PINS) went public on April 18^th and has seen 55% growth from its IPO pricing. Zoom Video Communications (NASDAQ:ZM) went public on the same day and has shown IPO investors 116% returns in less than 3 weeks.

It wasn't all roses for IPOs this year. Lyft (NASDAQ:LYFT) went public at the end of March and has lost over 25% of its market value from the IPO price.

Ride-hailing frontrunner, Uber (NYSE:UBER), is going public tomorrow for an expected valuation between $80 and $90 billion which would make the largest IPO of 2019. This estimate is down from earlier ranges following LYFT’s disappointing performance thus far.

Shifting Consumption

Beyond Meat’s success on Wall Street exemplifies a consumer shift. Millennials are now the largest consuming generation. They have a renewed focus on “healthy living” which now encompasses plant-based diets. Beyond Meat is able to satisfy consumers desire for a juicy burger without the gluten, soy, or GMOs found in ordinary animal beef. This plant-based burger has all the food critics raving, saying that it’s not just for vegetarians and vegans but for America’s typical carnivore who couldn’t say no to a delicious burger.

Beyond Meat has grown its revenue on an annualized average of 133% per year since 2016. The firm is still losing just under $30 million per year on its income statement. BYND’s cost of goods sold (COGS) currently eating up 75% of their top-line, though this is down from 139% in 2016. Getting their COGS down through economies to scale is going to be crucial for Beyond Meat to be profitable in the future.

Below is a trend chart comparing Beyond Meat’s sales and cost of sales, as you can see the margins have consistently expanded and gross margin is now sitting at 25%.

Funds Usage

BYND just raised about $250 million in there IPO, $40 million more than management’s expectations. They plan on investing $40-$50 million in its manufacturing facilities to expand output and meet consumer demand. $50-$60 million will be used to expand their R&D as well as sales & marketing capabilities all of which are vital for any young company’s growth. The remaining funds will be used in normal day-to-day operations and potential acquisition (though none are currently in the pipeline).

Take Away

BYND is something that I would stay away from until the market finds a fair value, give it a few weeks for the volatility to wane. This is a highly competitive space that has players in it that are able to scale production quickly with more initial resources. At the end of the day, BYND is a high-risk high-reward investment even at a lower valuation. Its progress so far is inspirational put keep an eye on future earnings to see if this progression can endure.

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