Beyond Meat, the manufacturer of plant-based burger patties that you can find at retailers like Target, has seen its stock climb from $30 during its May IPO to $151 today. The company, which earns $40 million in revenue on a few million in profits, is currently valued at $9 billion for a price-to-revenue ratio of 225. The P/E ratio would be like 2,000. Since meat alternative products are doing well with taste tests right now, and there are some markets that are reporting low inventories, the stock price of this business is being bid up on an almost weekly basis right now.
My prediction is this. On June 17, 2024, Beyond Meat will trade at a lower price than the $151 than it is trading at today [June 17, 2019].
I’ll share a couple reasons.
First, plant-based burger patties aren’t really proprietary. I know that Beyond Meat is claiming that their formula is special and unique, but you now have Nestle, Tyson Foods, Kraft Foods, and Mondelez all launching their own versions of plant-based patties. Even Sysco is going to get in on it. Heck, Tyson Foods owned 6.5% of the company, but recently sold it so it could compete with it directly and knock it out.
All Beyond Meat is exploiting right now is a first mover advantage. That is incredibly helpful for creating a “business moat” if you are company like Facebook where users return to the same platform because their intellectual property is stored on it so there is an escalating commitment/self-reinforcing bias to burnish the business, but that is not what Beyond Meat is. With a burger, you eat it and it’s gone. The customer is perfectly free to take in a plant-based burger that Nestle engineers and is sold at Target instead of a Beyond Meat patty.
Second, these burgers are not as healthy as being advertised. Yes, they have 350 calories instead of 480 calories, and have lower soy, saturated fats, and no cholesterol, but they only have half the protein but give you 5x the sodium. That is not a clean trade. There may be an animal rights angle to the appeal, but as far as healthiness of the burger, the difference isn’t as distinguishable as someone might initially presume and customers’ evolving education about these products will eventually lower the demand or at least dramatically lower the rate of growth for the demand.
Third, the valuation is crazy. Mature $9 billion businesses have to earn $350 to $500 million in profits to be worth that valuation. Beyond Meat isn’t even earning a tenth of that. The market for plant-based patties will need to increase thirtyfold in the next five years, and Beyond Meat’s market share at the same profit margins will need to hold for the next five years, in order to justify today’s valuation.
Now, this doesn’t mean I’m a critic of Beyond Meat’s business. I love the entrepreneurship and science behind the business, and it is commendable to try and deliver better food products to the masses. That deserves credit. Bill Gates was one of the company’s original backers, and he said he invested for ethical reasons. This company woke up a sleepy industry, and that’s great.
But I can’t ignore the copycat forces that have been unleashed. Every multibillion food manufacturer with a R&D budget is now launching a plant-based patty and this is going to be commoditized. It’s like Warren Buffett’s analogy about running the Berkshire textile mills where Hathaway linens were Sears’ top supplier until it tried to raise the price half a cent and then Sears revolted, knowing full well that men didn’t buy suits for the Hathaway linens and eventually Berkshire caved on its price hike.
Beyond Meat might have some pricing power now while it still has its first-mover advantage, but in a year it’ll try to raise prices in negotiations with Target and its other retailers but it’ll get shut down because Target will just supply plant-based patties manufactured by Nestle SA or some other food conglomerate that does it at a lower price.
In another world, Beyond Meat could have been an interesting long-term investment. If it were quietly selling its plant-based patties in certain regional strongholds, it could grow profits in a single-digit manner without the big food conglomerates competing with it because the market would have been too small to move the needle on earnings for a company like Nestle. But because it was so successful so quickly, the R&D department of every major food company is now throwing its heft towards mimicking what Beyond Meat is doing in greater volumes and at lower prices.
It’s a great story, not a great investment.