Will the Beyond Meat share price plunge when lock-up ends?
Beyond Meat shares will face a major test when the lock-up on most of its share capital will expire. We explain what to expect and what it means for both investors and traders.
When does Beyond Meat’s lock-up period end and what will happen?
The lock-up period on Beyond Meat shares will expire on Tuesday 29 October. On this date, a flood of new shares can be freely traded in the market.
Those investors that bought shares in Beyond Meat before its initial public offering (IPO) on 2 May are currently subject to a lock-up agreement. This means the company’s founders, management and early investors are unable to sell their shares in the business during the 180 days after the IPO.
This is a significant event because up to 48.6 million Beyond Meat shares – equal to around 80% of its share capital – will become available on the market. Just under 17 million of those shares will still be subject to rules that restrict the speed and volume of any sales, but the rest can be freely sold.
Lock-up periods are designed to minimise the amount of selling pressure and volatility imposed on the shares of a newly-listed business, so both of these things tend to increase once the lock-up ends. Such a large number of shares entering the market is likely to weigh on Beyond Meat’s share price and inject some short-term volatility.
Will early investors in Beyond Meat cash out?
The owners of the lock-up stock are able but not obliged to sell their shares once the period ends, but there are several reasons to believe early investors will look to reap the reward of their investment in Beyond Meat.
Firstly, those that invested in Beyond Meat shares when it launched its IPO are sitting on some tidy profits. The company went public on 2 May at $25 per share and closed above $66 on its first day of trading. The stock has fallen dramatically from its peak in late June of $234.90 and currently sits at $110, but that is over four times higher than the IPO price. It is important to remember that the shareholders subject to the lock-up period are likely to have paid significantly less than the IPO price of $25. This means the potential profits on offer once the lock-up expires will be even greater for them.
Secondly, some early investors have already managed to cash out before the end of the lock-up period. Beyond Meat surprised the market at the end of July when it announced it would sell 250,000 new shares in the business and 3.5 million existing shares owned by early investors through what is known as a secondary offering. Secondary offerings are a way of allowing investors to get around lock-up periods, and they were right to do so too – selling at $160 per share. This shows there has been demand from investors to cash out while prices are high.
Thirdly, the opportunity for further gains in the near future could be limited. There are currently eight brokers with a Hold recommendation on Beyond Meat, two with Buy, one with Sell and one with Strong Sell (for an average recommendation of Hold). In recent months, several analysts have released notes saying that the valuation had soared too high and needed to be tempered. CFRA, one of the world’s largest independent investment research firms, argued earlier this month that ‘the number one reason for investors not to buy Beyond Meat shares at this time is the fact that Beyond Meat’s lockup period expires on 29 October’.
‘Given the dramatic appreciation since the IPO, we expect many insiders and private equity funds to cash out, putting further downward pressure on the stock,’ CFRA added.
Fourthly, Beyond Meat is one of the most-shorted stocks in the US. According to a report from S3 Partners on 14 October, around 47% of Beyond Meat shares were out on loan to short traders. It said it was the ‘most expensive actively shorted stock’ and the 26th most-shorted stock in the US. Notably, a number of other newly listed businesses that will see their lock-up periods expire in the coming weeks are also on the most-shorted list – including RealReal, Luckin Coffee and Fastly.
Watch out: Beyond Meat to release quarterly results day before lock-up expires
It is vitally important to know that Beyond Meat will release quarterly results on Monday 28 October – the day before the lock-up expires. This means the investors subject to the lock-up will not be able to freely sell their shares in the company until the day after the results. This could dramatically impact the number of shares the early investors sell. If results disappoint and shares spiral lower, then it could drive them to either hold off selling in the hope of higher prices, or encourage them to reduce their exposure more than originally planned if their confidence in the long-term prospects is affected. If the price pops higher, then this could spur them to sell larger volumes to capitalise, or less if they can raise the same amount of money by selling fewer shares.
Beyond Meat has pleased investors with its results so far. Its second quarter (Q2) results released in late July were overshadowed by the secondary offering and placing of new shares, but it still delivered net revenues of $67.3 million, 3.8 times higher than the year before, and raised its guidance for the full year. It is currently expecting to deliver annual net revenue of $240 million and ‘positive’ adjusted earnings before interest, tax, depreciation and amortisation (EBITDA). It was previously targeting revenue of $210 million and break-even adjusted EBITDA. When it releases its Q3 results, any further changes in guidance will be significant.
What can you learn from the end of the lock-up on Beyond Meat shares?
It is unlikely that any single investor will offload their entire stake in Beyond Meat when the lock-up ends but sell down their stake to reap some profits because they haven’t had the chance to do so in the last six months. However, it is worth watching who is selling what. Early investors will want to retain a sizeable stake in Beyond Meat if they believe in the company’s long-term prospects and will look to sell more if they think they need to reduce their exposure.
Beyond Meat shares: short term vs long term
It is not guaranteed that Beyond Meat shares will fall when the lock-up period expires, especially with results being released the day before. Still, it is hard to see how such a huge number of shares coming on to the market will not apply some short-term selling pressure on Beyond Meat shares. Typically, if there is a sharp increase in the number of available shares then this pushes the price of a stock down.
It is usual to see a stock’s share price fall on the first day that the lock-up shares can be traded. In fact, if other investors (not subject to the lock-up period) begin to sell in the days before the lock-up expires, then this is a sign that they expect the share price to fall. Beyond Meat shares have been in decline since late September, and have lost over a quarter of its value since the start of the month. Looking at 15 stocks that saw their lock-up periods expire in the first two weeks of October, the majority of shares started to fall in the days before the expiration date, prior to bouncing back three to five days afterwards. However, some saw virtually no selling pressure on the day, and the share price immediately climbed once the lock-up had ended. Pinterest and Zoom both experienced selling pressure when their lock-up periods expired on 15 October.
The recent drop in Beyond Meat shares has mostly been driven by the need to have its value tempered rather than any concerns about its prospects. The company has been applauded for its role in bringing plant-based meat alternatives to the mainstream by targeting flexitarians rather than the more hardcore vegans and vegetarians, and it is a leader in a fast-growing market. Estimates of how much the market will be worth over the coming years varies wildly, but all point to rapid growth. UBS has forecasted the market could be worth $85 billion by 2030, while Barclays has said it could be as much as $140 billion.
Investors are also wary about high-growth companies that are in the red after several high-profile IPOs went wrong this year, such as Uber which admitted it may never be profitable. Beyond Meat is still loss-making and burning through cash – the net outflow in operating cashflow doubled year-on-year to $22.4 million in the Q2. Competition is increasing too. It has been in a battle for supremacy with its main rival Impossible Foods, but there are concerns that these revolutionary start-ups will be overtaken by the larger players that are entering the field over the long term, such as Nestle and Kroger.
Beyond Meat shares: technical analysis
Beyond Meat shares have been on a rollercoaster since their inception back in May, with the stock initially rallying an almighty 858% from its IPO price of $25 in just over two months. However, we have seen the stock slump since then, losing 54% to take us back to the $110 level seen today. That decline was recently solidified with the breakdown below $133.17, completing the breakout from a descending triangle formation. To an extent that was also the breakout from a complex head and shoulders formation, which could bring greater worries for holders of this stock. The traditional method of projecting the height of the head on the breakout would point towards a potential decline into the $35 region. Alternately, a more conservative method is to project the height of the right should, which would provide us with a target of $95. In either circumstance, there is clearly a strong possibility we will see this current decline persist.
The four-hour chart highlights how heavily we have been trending, with price tracking the lower Bollinger Band since the break below $133.17. We are seeing the stochastic break through trendline support, pointing towards some form of upside retracement coming into play before long. However, as long as the price remains below the middle Bollinger Band and $126.42 swing high, any short-term upside would be deemed a selling opportunity.
How to trade Beyond Meat shares as lock-up expires
There are a few ways to trade the expiration of a lock-up period following an IPO. If you believe the stock is going to suffer as a result of the lock-up period expiring, then you could short the stock in the days beforehand. You could do this using an IG’s spread betting or CFD services, which also allow you to utilise leverage.
For investors, it could present a different opportunity. If you missed out on buying any shares when a stock conducted its IPO, or feel like you have been priced out, then any knock to the share price when the lock-up period expires could present an opportunity to buy at a cheaper price. This only applies if you believe in the stock over the long term, and want to get a cheaper entry point. You can use an IG share dealing account to do this and will own the shares outright, benefiting from any appreciation in price as well as any dividends that are paid.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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