Beyond Meat: where now after Q2 earnings sees stock fall?
Beyond Meat’s share price has skyrocketed since listing. But with such a lofty valuation and news it will raise more equity just two months after its IPO, is there still an investment case?
Beyond Meat's latest quarterly results showed demand for its plant-based products, designed as an alternative to meat, remains strong and that the company is moving toward profitability. Net revenues in the second quarter of 2019 almost quadrupled from the year before, its gross margin more than doubled to hit a new record, and it reported its first positive operating profit, having consistently reported losses beforehand. In fact, demand has risen so much that the company raised its full year guidance. Beyond Meat said it expects to post positive earnings in 2019, having previously said it would breakeven.
But Beyond Meat shares, having reached as high as $234 from its initial public offering (IPO) price of just $25, fell as much as 14% in after-hours trading following the second quarter (Q2) results after the company said it would raise more equity just three months after listing, and because of growing fears about its lofty valuation and the challenges that lie ahead.
Beyond Meat results beat expectations as aggressive expansion continues
Beyond Meat delivered net revenue of $67.3 million in Q2 2019, which was 3.8 times greater than the year before and 67% higher than Q1 2019. That comfortably beat the $52.7 million that analysts were expecting. Its gross margin has been consistently improving over the last two years and hit a new high in Q2, and Beyond Meat reported its first, albeit small, operating profit of $2.2 million.
Still, it posted a wider quarterly pre-tax loss, although this was solely caused by a $11.7 million non-cash expense related to its IPO in May, without which it would have escaped the red.
Beyond Meat quarterly results: moving in the right direction ($, 000s)
|Q1 2017||Q2||Q3||Q4||Q1 2018||Q2||Q3||Q4||Q1 2019||Q2|
|Operating profit (loss)||(4,878)||(11,081)||(6,653)||(5,953)||(5,579)||(7,276)||(8,004)||(7,130)||(5,298)||2,167|
|Pre-tax profit (loss)||(5,000)||(11,215)||(7,161)||(7,003)||(5,969)||(7,396)||(9,342)||(7,451)||(6,649)||(9,420)|
Beyond Meat: growth is driven by fresh rather than frozen
Beyond Meat sells multiple products under two categories: fresh and frozen. Net revenue from the company’s first products, Beyond Beef Crumbles and Beyond Chicken Strips, which are both frozen, was 9.7% higher in H1 of 2019 compared to the year before. But it is fresh produce that is driving the bulk of growth, mainly led by its flagship Beyond Burger (but also the Beyond Sausage and Beyond Beef, the last of which has only just been launched). Net revenue from its fresh goods was over four times higher year-on-year (YoY) in H1 2019. The Beyond Burger and its other fresh goods have been so successful that they accounted for over 91% of total net revenue (before discounts are taken into account) in H1, compared to less than 75% the year before.
Beyond Meat delivers strong growth in sales to both retailers and restaurants
Beyond Meat’s products are available to buy in retail outlets, such as supermarkets, as well as restaurants and other food outlets. Net revenue from selling to retailers more than doubled YoY in H1 and sales to restaurants performed even better, coming in 5x higher. Its overall net revenue is now broadly a 50:50 split between retail and restaurant clients, whereas a year ago it was generating 70% of sales from retailers and just 30% from restaurants.
Beyond Meat said its products were now on sale in over 53,000 retailers and restaurants around the world. That is up from around 35,000 places when it launched its IPO and just 28,000 at the end of September 2018, having added major customers like Carl’s Jr and Kroger. It is clear that selling fresh produce to restaurants is the strongest area of growth, but the rate of growth in sales to retailers is nothing to be sniffed at.
Beyond Meat raises 2019 guidance
The stronger than expected results prompted Beyond Meat to raise its guidance for the full year. It said it now expects to book annual net revenue of around $240 million after initially forecasting $210 million. The new guidance suggests net revenue will be 2.7x higher than the $87.9 million recorded in 2018.
Beyond Meat is also confident it can now deliver positive adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) in 2019, having previously said it expected to breakeven. That was after it reported adjusted Ebitda of $6.9 million in Q2, equal to about 10% of net revenue. That turned positive from the $2.1 million loss reported in Q1.
Beyond Meat’s chief financial officer Mark Nelson said: 'We are pleased with the positive level of adjusted Ebitda we achieved in the second quarter. The early benefits we are seeing on cost productivity across our supply chain and manufacturing network, in conjunction with solid demand through our customer partnerships, have helped deliver these strong gross margin and operating margin results.'
The spike in Beyond Meat shares prompts firm to tap equity markets
Beyond Meat was overly cautious when it launched its IPO at the start of May. After seeing such mixed performances from companies that have decided to list in 2019 – especially from momentum stocks like Beyond Meat that derive their value from growth potential rather than profits - it was wary of pricing its IPO too high.
But, even after raising its IPO price to $25 per share from an initial range of $19-$21, it seems Beyond Meat missed an opportunity to raise the considerable sums it will need to keep up with demand. Beyond Meat shares closed up 163% on their first day of trading and, even after experiencing a dive following the Q2 results, are worth over $222 per share. Beyond Meat, having started public life with a valuation of $1.5 billion, is now worth more than $13 billion. Beyond Meat raised nearly $241 million by issuing 9.6 million shares at the IPO price, but it is clear the company could have raised significantly more if it had thrown more confidence behind its value.
Still, the sky-high valuation presents an enticing opportunity for the business and its shareholders. It has encouraged investors to cash-in on part of their holdings and prompted the company to raise more funding for expansion while demand is high. Although Beyond Meat said the sums raised through its IPO was meant to keep the company going for a year, it did warn that it may need to raise further funding – whether that be through equity or debt – sooner than planned depending on how things pan out.
That warning has now come to fruition after Beyond Meat released a separate statement alongside its Q2 results that said it is planning to raise more equity just three months after its IPO. However, the bulk of the shares to be sold are from existing shareholders and only a small number of new shares are being issued. Early investors including Beyond Meat’s chief executive Ethan Brown and the Gates Frontier fund, which invests on behalf of Bill Gates, will sell 3 million shares under a fully-underwritten placing. They also have option to sell up to a further 487,500 shares. The sellers will reap the profits and Beyond Meat will not receive any proceeds.
Beyond Meat will reap the proceeds, however, by issuing 250,000 new shares. The price of the shares has not yet been disclosed but, based on a price of $222, that would raise $55.5 million before costs. Dilution to existing shareholders will be minimal, with the new shares equal to around 2.5% of the company’s enlarged issued share capital after the fundraise is completed.
It is important to note that Beyond Meat has said the fundraising is 'subject to market and other conditions', adding 'there can be no assurance as to whether or when the offering may be completed'.
Why did this spook investors?
There are a few reasons why the plans to raise equity overshadowed the stellar results. Firstly, some investors will have needed little encouragement to cash-in after such a strong increase in the share price. Herd mentality will have assisted that somewhat, as some may have sold out of fear that their juicy profits were about to vanish as the share price declined.
Secondly, returning to the markets so soon after listing has installed fear that Beyond Meat will need to continue to raise more equity if it is to keep up with demand and maintain growth. Beyond Meat operates a very lean, asset-light business model: it produces all of the 'primary components' of its products and all the Beyond Burgers sold to restaurants and other food service outlets itself, but the company depends on co-manufacturers for everything else.
The fact that it has no written contracts in place with any of its manufacturing or distribution partners heightens the risk of this strategy, even if outsourcing work and leveraging sites and infrastructure of third parties allows it to scale up quicker. It has admitted that it does 'not own any real property' because all its own facilities are leased.
It plans to use the proceeds from the latest fundraising to increase its own production capacity in Missouri, US, and to buy new equipment, but it has said it intends to rely heavily on partners for stuff like packaging. Still, analysts pressed Beyond Meat’s board during the post-Q2 earnings call on how it plans to deal with fears that it won’t be able to meet demand if it keeps growing at its current rate. Beyond Meat has been hit by supply shortages before, primarily because it sources all of its pea protein - used in its key Burger and Sausage products – from just one supplier. One of its biggest rival, Impossible Foods, has also reportedly thrown plans to open its own retail outlets on the backburner because of concerns it can’t adequately supply them. Beyond Meat said it is confident that it had the necessary supplies to keep up with demand and noted that new formidable players had entered key markets, pointing to DuPont’s entry into the pea protein market.
Longer term threats are slowly emerging
Thirdly, although the hype around Beyond Meat’s prospects has continued to grow since its IPO, so have the long-term concerns. More questions are being raised about how healthy plant-based, meat-alternative products are and, because it is one of the market leaders, Beyond Meat is taking the brunt of criticism. Some are criticising the nature of the industry altogether: selling processed produce at sky-high prices. Processed foods do not have the best image and have been linked with disease and obesity, and data from Nielsen suggests US supermarkets are paying around 10 cents per gram for plant-based meat products - more than twice the 4 cents for beef and 2 cents for chicken and pork.
Beyond Meat has stressed that it is about how its products are processed, and it is right to a degree. Although many unhealthy products such as crisps, bacon, microwave meals and cakes are classed as processed foods, there are many other products that need to be processed in order to be safe, like cheese or milk. Official guidelines from the NHS state that 'not all processed food is a bad choice'. Still, processed foods do not have a good reputation among consumers and the debate over the health implications of eating more plant-based, processed food will rage on for years to come.
Beyond Meat and its rival’s marketing strategies are also coming under fire. The European Union (EU) is currently considering a ban on meat alternative products being described as, well, meat. This would bring an end to terms like vegetarian burgers or a vegan sausages, and although the proposal has been criticised as ridiculous by many (with many intriguing arguments being made, like the fact the term hamburger can be used even though they don’t contain ham), it obviously poses a threat to a company that calls itself Beyond Meat and sells the Beyond Burger.
In the longer-term, some believe there is a much bigger opportunity beyond plant-based meat alternatives. US management consulting firm AT Kearney suggests sales of plant-based meat alternatives will grow annually by 20% to 30% in the coming years. But it believes the emergence of cultured meat – whereby real meat is grown in a lab without the need to slaughter animals – will quickly overtake plant-based alternatives as technology and acceptance develops. It believes traditional meat will make up 90% of the total ‘meat’ market (including plant-based meats, traditional meat and cultured meats) in 2025, with the other 10% made up of plant-based alternatives. However, by 2040, cultured meat is expected to account for 35% of the market, with plant-based alternatives accounting for 25% and traditional meat at 40%.
Beyond Meat shares: where next after Q2 results?
The rise in Beyond Meat’s share price has been a boon for those investors that grabbed a slice of the company at its IPO or soon after it listed. But the spike in price makes the company a less attractive investment opportunity for those that want to invest now – and it has also ignited interest from short sellers. A report from S3 Partners that was released on July 25, before the Q2 results were released, suggested Beyond Meat was the third-largest shorted stock in the Packaged Foods and Meats sector, stating that a staggering 46% of Beyond Meat shares were in the hands of short sellers.
Beyond Meat stock price: technical analysis
A daily price chart of Beyond Meat shows the company to be in an uptrend since its listing in May 2019. In the near term we see the price correcting from overbought territory back to trend line support.
The correction from overbought territory has been catalysed by news that the company will be looking to raise further capital and that some early investors will be selling down their respective holdings in the company. The decline on the day of the news was in excess of 13%. The capital raise will see a dilution in the issued share capital of Beyond Meat and in turn skew the technical picture.
While newly issued shares will only account for a dilution of 2.5% in the company, the 3 million share overhang being sold off by the company’s chief executive and the Gates Frontier Fund, does little to instil investor confidence, perhaps a suggestion of a current overvaluation in a company which remains unprofitable.
Should trend line support break, 146 becomes the initial support target from the move. Below 146 further support targets considered are located at 122 and 106 respectively.
How to trade Beyond Meat shares
Beyond Meat shares have been highly popular among IG clients since listing. It was the eighth most-traded stock on the IG platform in the seven days to July 30, and the 13th most-traded over the last 30 days. According to Reuters, all seven brokers that have a recommendation on Beyond Meat shares have a Hold rating as of July 30.
You can either invest in Beyond Meat, whereby you buy the shares outright and benefit from any increase in share price and any dividend payments, or trade them, whereby you speculate on the future price movement of Beyond Meat shares, whether that be up or down.
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