Beyond Meat: Unhealthy For The Heart And The Portfolio

May 9, 2019 3oliver

Normally when I see exciting “tech” startups IPOing at lofty valuations I just groan and recognize that we are in a speculative growth kind of market. Ordinarily, I keep these thoughts to myself, but I feel compelled to write about my distaste for the Beyond Meat (BYND) IPO price action due to a combination of its extreme valuation and the lack of viability of its product.

I am not here to comment on the flavor or mouthfeel as these are subjective and some people may enjoy the product. Instead, I want to discuss the nutrition and the misconceptions resulting from how this product is marketed. Eventually, the substandard nutritional content will hamper demand for the product and its valuation is predicated on massively higher demand.

Those who follow my work know that I am a REIT dedicated analyst, so Beyond Meat is well outside of my normal research, but I am a nutritionist by education with a B.S. in dietetics from UW Madison.

The food industry is among the most dishonest when it comes to marketing and in many cases this marketing endangers the health of an unsuspecting public.

There are harmless instances of misleading like when bottled water advertises as having 0 calories. Such misinformation usually starts with a grain of truth (it does in fact have 0 calories), but the information is placed on the package to mislead the uninformed consumer into thinking this water is somehow healthier than the brand they would otherwise drink.

The misinformation campaign is far more pernicious when a company attempts to trick consumers into thinking an unhealthy product is good for them. I do not intend to impute Beyond Meat’s motives, nor can I say that the company intended to mislead consumers. However, 2 things are clear:

Beyond Meat advertises the product as nutritionally healthy
The product is NOT nutritionally healthy. It is arguably worse than real beef.

We intend to demonstrate these 2 points and follow with the implications on future revenues and value.

Advertised as healthy

Let us begin with the packaging. Most food packaging tries to put the best foot forward. This is rational and normal. I believe the Beyond Meat packaging does a good job of advertising its strengths.

Source: Beyond Meat

I believe Beyond Meat that this product is soy-free and gluten-free and that it has 20 grams of protein.

Factually correct, but it entirely misses the point. Real beef is also soy-free, gluten-free and high in protein.

Having such claims on the label is just putting out platitudes that reinforce public misconceptions. The public is predisposed to thinking plant-based products are healthier, and Beyond Meat is capitalizing on the misinformation.

Without lying, the company furthers the notion that Beyond Meat patties are healthier than beef.

While I am not happy about the packaging, it falls within the realm of normal food industry advertising. Beyond Meat’s website and YouTube video go a bit too far.

It features Kyrie Irving (of whom I happen to be a big fan) performing various basketball drills and in big font it says.

“Fueling athletes to perform better and recover faster”

Now that is an unsubstantiated claim if I have ever seen one. Kyrie Irving may have said the product helps him recover faster, but as he is involved with the company, he is clearly biased.

Nutritionally, there is no reason to suspect this product is in any way good for athletic performance.

Let us take a look at the nutrition facts.

Source: Beyond Meat

If you have looked at nutrition labels before you know that they usually lead with total fat. Beyond Meat has conveniently omitted this line item.

Fortunately, it can be back calculated. Fat has 9 calories per gram so with 170 calories coming from fat that is about 19 grams of which 5 are saturated. It is extremely high in both fat and saturated fat. 63% of total calories come from fat.

This is based on a 4oz serving. Let us take a look at 4 ounces of real beef to compare.

Source: Nutritionix

Real beef has substantially less fat at 12.5 grams per 4 ounce serving. About 47% of calories come from fat in real beef as opposed to 63% for Beyond Meat. Beef is also lower calorie coming in at 242.7 compared to 270 for the same 4 ounces of Beyond Meat.

Nutritionally, the benefit to having meat in one’s diet is primarily the high-quality protein that is rich in essential amino acids. Beef is well-known as a complete protein, containing all 9 essential amino acids in balanced concentrations. Pea protein, such as that used in Beyond Meat, is a reasonably good substitute as a mostly complete protein. The problem here is the macronutrient ratios.

Eating real beef, one gets 30.7 grams of protein per 12.5 grams of fat; a decent ratio.
Eating Beyond Meat, one gets 20 grams of protein per 19 grams of fat; a poor ratio.

Essentially real beef is lower-calorie, higher-protein and lower fat. In my opinion, real beef is the healthier option and that is sad because real beef is not a particularly healthy food.

Anyone looking for a healthy protein fix would be much better off turning to chicken. Not veggie chicken. Not fake chicken. Just clean boneless skinless chicken breasts.

Protein at its finest.

Who are the customers?

The customer base can be thought of as groups of people seeking particular attributes of the product.

This product is not a value product as it comes with a high price tag of $12 a pound ($6 for 8 oz) which is substantially more than real beef.

Source: Target

Thus, the customers of Beyond Meat largely fall into 3 categories:

Those who buy for environmental or social reasons
Those who buy for health reasons
Those who buy out of curiosity

I think there is a fair argument that Beyond Burgers are better for the environment and better for animal welfare than real beef. That being said, it is not good for the environment or animals, it merely causes less harm. This product is the environmental equivalent of eating any other plant-based foods. I suspect environmental and social concerns will continue to be a strong driver of demand for the product.

However, the other 2 sources of demand are likely to fall off substantially. Purchases of curiosity only work once per customer. They try the product and curiosity is satisfied after which point the product has to survive on its own merits to be bought again.

So far, the purchases for health reasons are going strong, but as we demonstrated above, these sales are predicated on a false notion that the product is healthier than beef. Eventually, truth always prevails so as this product becomes more well-known, an increasing portion of the potential buyer base will learn that it is extremely high in fat.

I believe sales will continue to grow in the near term as the IPO generated substantial buzz about the product which will materially increase curiosity sales. However, I think this boom will be short-lived as there is not enough stand-alone value in the product to maintain any customers outside of the hard-core socially conscious.

Most of us want to do the right thing and want to help the environment/animals, but there is a limit to the lengths that the general populous will go. Paying roughly double the price for a product that is higher fat and lower protein and probably doesn’t taste as good to most people is a big ask relative to the magnitude of good.

As such, I am skeptical that BYND’s sales can explosively grow to the extent that is being priced into the stock.

Valuation

So far, the sales are fairly impressive with revenue growing at a rapid pace from $16mm in 2016 to $88mm in 2018. Source: IPO Prospectus

The market appears to be extrapolating this growth rate for quite some time with a huge rally post IPO.

Source: SA

It came out at the start of May at $25 and closed 5/7/19 at $79.17. A triple in less than a week.

Such a movement does not guarantee that the stock is overpriced as there is the possibility that the IPO simply underpriced it, so let us take a look at some metrics.

P/E cannot really be used as earnings are negative, so this would be infinite.
Book value doesn’t work as this is an asset-light company where the value is in the demand for the product.

I would propose valuing it on EV as a multiple of revenue. With 2018 revenues of ~$88mm, and an EV of $4.47B, that is an EV/revenue of 50.8X.

Clearly, the market is baking in quite a bit of growth. Mature food product companies like Tyson Foods (TSN) and Hormel Foods (HRL) trade at 1.01X and 2.22X EV/sales, respectively.

Source: SA

This implies that in order to live up to its valuation, BYND needs to organically grow its sales 25X which equates to about $2.2B in annual sales.

I don’t think the hard-core environmentalist market is big enough to support sales of that magnitude. Growing revenues that much would require people buying for other reasons. Once the fat content becomes more broadly known, health-related purchases go out the window and curiosity purchases will naturally taper off.

It seems unlikely that BYND can live up to the market valuation.

It is a short?

In my opinion, it is too risky to short a stock that is this new and this volatile in its market price. ESG investing is a powerful force that could take the market price far higher before rational pricing ever manifests.

Thus, I am steering clear but keeping it on my watchlist as a potential future short once the craze dies down.

Conflicts of Interest. We routinely own and trade the same securities purchased or sold for advisory clients of 2MCAC. This circumstance is communicated to clients on an ongoing basis. As fiduciaries, we prioritize our clients’ interests above those of our corporate and personal accounts to avoid conflict and adverse selection in trading these commonly held interests.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is provided for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the writer. Information contained in this article is impersonal and not tailored to the investment needs of any particular person. It does not constitute a recommendation that any particular security or strategy is suitable for a specific person. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. The reader must determine whether any investment is suitable and accept responsibility for their investment decisions. Dane Bowler is an investment advisor representative of 2MCAC, a Wisconsin registered investment advisor. Commentary may contain forward-looking statements which are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCAC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts and findings in this article. Positive comments made by others should not be construed as an endorsement of the writer’s abilities as an investment advisor representative.