Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
For the imitation-meat maker's IPO on May 2, JPMorgan was one of the two biggest underwriters, organizing the sale of more than 2.7 million shares to the public, and presumably cheering along as the stock soared 163% in a single day.
For three weeks thereafter, JPMorgan stayed silent, subject to the post-IPO quiet period.
On May 28, the period expired, and JPMorgan joined a chorus of analysts shouting buy ratings on Wall Street.
On Friday, JPMorgan doubled down, reiterating its overweight rating and raising its price target from $97 to $120.
And today...it all ended. JPMorgan has removed its buy rating from Beyond Meat, and shares are plummeting in response.
What you need to know
Last night, Beyond Meat tipped the scales at a weighty $168.10 per share, representing an incredible gain of 570% in a little over a month's time. Such a journey bears examination, so let's take a quick look back over how JPMorgan has described the stock so far.
On May 28, three weeks after its IPO, Beyond Meat began trading just short of $84 a share, up 236% from its IPO price. Despite these already mammoth gains, in its May 28 initiation of coverage, JPMorgan showed no hesitation in endorsing the stock. Predicting that the market for plant-based "meat" would grow 100 times in size from what it is today, the analyst called Beyond Meat's growth potential "extraordinary." Estimating the market size for imitation meat products at $100 billion in 15 years, JPMorgan noted that if the company should capture even 5% of total sales, it would be doing $5 billion in business a year.
No wonder the analyst saw little difficulty with the stock reaching $97.
Earnings come out
Barely one week later, Beyond Meat showed it was well on its way to making JPMorgan's predictions a reality. In its first earnings report as a publicly traded company, Beyond Meat posted 215% year-over-year sales growth in its fiscal first quarter 2019, with restaurant sales nearly quintupling in value. Gross profits surged, operating losses sank, and the company set a full-year sales target of $210 million -- implying that sales growth will accelerate as the year progresses.
JPMorgan quickly did some back-o'-the-napkin math, updated its predictions to call for a gross margin of 40% to 50% (nearly twice Q1's 27% gross margin), and reiterated its overweight rating, this time with a new $120 price target.
Boy, was that ever a dumb call.
Just two trading days after JPMorgan reiterated its buy call, Beyond Meat shares zoomed up 69%, landing at $168.10 last night. In a flash, the stock had eclipsed the analyst's highest hopes by more than 40%. But as it turned out, this was the feather that broke the camel's back.
When we raised our price target to $120 from $97 last Friday morning, the shares most recently traded at $99.50; yesterday they closed at $168.10, a +69% move in two days (SPX +2%). As we wrote last week, "At some point, the extraordinary revenue and profit potential embedded in BYND... will be priced in" -- we think this day has arrived.
So wrote JPMorgan this morning, explaining why it has decided to break ranks and step to the sidelines on Beyond Meat. Although the analyst's expectations for the company "remain unchanged," its stock price has become indefensible. As a pure "valuation call," therefore, JPMorgan is cutting its rating on Beyond Meat shares to neutral.
What it means to investors
Beyond Meat investors are, quite naturally, not happy with this move. Shares are down more than 19% as of 10:15 a.m. EDT, and probably going lower as news of JPMorgan's reversal spreads.
But can you blame the analyst? After all, this banker has stuck with Beyond Meat through thick and thin, even as its valuation became ever less tenable in the weeks following its blockbuster IPO. At more than 72 times trailing sales, and nearly 40 times the sales target that the company set for itself last week, Beyond Meat shares are very expensive. At some point, the laws of gravity simply must reassert themselves. JPMorgan believes today is that day.
And I agree.