Beyond Meat (BYND) is now probably the hottest stock in the world.
Its innovative “plant-based meat” is found in the frozen food section of thousands of grocery stores. Carl’s Jr., Del Taco, and a few other restaurant chains sell its products, too.
Supposedly, it tastes just like real meat but is better for animals and for the environment. Many investors expect plant-based meat to be the “next big thing.”
The chart below says it all.
Beyond Meat’s stock shot up 840% after going public on May 2!
I’ve never seen anything quite like this. It’s the top-performing IPO of the year and one of the best of all time.
Make no mistake, Beyond Meat’s crazy 840% gain in not even three months is an outlier. But it’s not all that uncommon for stocks to skyrocket shortly after going public. The average return for a US IPO last quarter was 30%.
Get into the right IPO or disruptor stock (find our top picks for 2019 here), and you can realistically make huge gains within weeks, sometimes days.
But with the giant early gains in Beyond Meat behind us, the question now is: Does the stock have staying power? Should you buy it now?
Let me explain why the answer is NO.
Do You Remember the LaCroix Craze?
LaCroix is a popular brand of flavored sparkling water.
You’ve probably seen it at the grocery store. Its “retro” packaging jumps off the shelf.
It tastes pretty good, but it’s nothing special. There are plenty of sparkling water brands that are just as good.
And yet, LaCroix became a cultural phenomenon a few years back. Young adults were obsessed with it.
Like Beyond Meat, people thought it was the “next big thing.” Investors loaded up on shares of National Beverage (FIZZ)—the parent company that owns LaCroix.
National Beverage’s stock surged 550% from May 2015 to September 2017.
It was madness. At its peak, FIZZ traded at a price-to-earnings (P/E) ratio of 58. Investors were paying $58 for every dollar of profit the company made. That was more than double the S&P 500’s P/E at the time.
All for a company that sells sparkling water.
National Beverage’s Crash No One Saw Coming
National Beverage failed to live up to the hype. Its stock plunged 31% in nine months after peaking in September 2017.
Today, FIZZ trades at 66% below its 2017 high.
The thing is, people didn’t stop drinking sparkling water. Sales of sparkling water have nearly tripled over the past decade. Last year, Americans spent $49 million on sparkling water—22% more than in 2017.
But people are drinking a lot less LaCroix. Its sales plunged 15% this May. That’s after falling 6% in February… 5% in March… and 7% in April.
Where did LaCroix go wrong?
Coca-Cola (COKE) Bought Topo Chico in 2017
Topo Chico is a trendy Mexican sparkling water brand.
PepsiCo (PEP) got into the business, too. It recently launched its own sparkling water called Bubly. It also owns Spindrift—a brand that’s caught on with Millennials.
Even Costco (COST) has entered the market. Last summer, the retail giant started selling zero-calorie flavored drinks under its private Kirkland Signature brand.
In short, LaCroix ran into powerful competition. Sparkling water is easy to replicate. Now people have lots of brands to choose from. That sucked the wind out of National Beverage’s sails and caused its stock to tank.
The Exact Same Thing Will Happen to Beyond Meat
Some will call this an unfair comparison. They’ll argue Beyond Meat is more innovative than National Beverage. They’ll say it has a “first-mover advantage.”
It’s true that Beyond Meat introduced plant-based meat to the masses. But let’s not forget that plant-based meat is a basic consumer good. It’s a commodity that can be easily replicated.
Commodities that can be easily replicated compete on price. That’s a big problem for Beyond Meat because its products are expensive…
Its hamburger cost anywhere from double to triple what real hamburger costs.
Beyond Sausage, another one of its products, sells for around $10.30 per pound. That’s 70% more than what pork sausage sells for.
It can’t charge such sky-high prices for much longer. In fact, competition is already heating up.
Impossible Burger also sells plant-based burgers. You can buy its products at more than 9,000 restaurants, including Qdoba and Burger King.
Tyson (TSN)—the largest US meat producer—is also developing its own line of alternative meat products. It was an initial investor in Beyond, but sold its stake in April.
Nestle—the world’s largest food company—has entered the plant-based market, too. It’s selling its “Incredible Burger” in Europe already. The company plans to introduce this product to America by fall.
Finally, JBS—the world’s largest meat producer—is also looking to launch a plant-based meat product in Brazil this year.
Soon, Every Major Food Company Will Have Its Own Plant-Based Burger
These companies have deeper pockets and better distribution than Beyond Meat.
They can develop new products and bring them to market much faster than Beyond Meat.
Perhaps most importantly, they charge less than Beyond Meat.
This will force Beyond Meat to either cut prices or surrender market share. Both would be bad for investors.
Beyond Meat’s Stock Is Absurdly Expensive
It trades at a price-to-sales (P/S) ratio of 87. Investors are paying $87 for every $1 that Beyond Meat generates in sales.
Let me put that in perspective…
Tyson trades at a P/S of 0.73. Conagra Brands (CAG) trades at 1.5X times sales. And General Mills (GIS) trades at 0.4X sales.
Should Beyond Meat trade at a premium because it’s a disruptor stock changing the way we eat? Okay. Let’s compare it to another disruptive company: The Match Group (MTCH).
The Match Group is disrupting how people find love. It dominates online dating, it’s growing like crazy, and its stock has delivered 416% gains since it went public in November 2015. That’s 10 times the S&P 500’s return over the same period.
Match.com trades at 12 times sales. Its stock is 1/7 as expensive as Beyond Meat’s!
Like National Beverage, Beyond Meat Won’t Live Up to This Absurd Valuation
That doesn’t mean Beyond Meat will disappear. But the hysteria will fade away.
When that happens, its stock should come crashing down. I wouldn’t be surprised if BYND falls another 30% or more once investors realize powerful competitors are coming for its market.
If you own Beyond Meat stock, you’re probably sitting on big profits. Nice call. But consider selling your shares to lock in those profits as soon as you finish reading this.
The clock is ticking. Once investors wake up to the tough competition Beyond Meat faces, its stock could drop fast.
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