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...
Shares of artificial meat producer Beyond Meat (NASDAQ:BYND) surged 6.5% yesterday, and you don't have to look far to find the reason why.
On Tuesday, investment banker J.P. Morgan -- one of the stock's original IPO underwriters and also the analyst who famously downgraded Beyond Meat on June 11 -- did an about-face and reupgraded the stock to overweight.
The reason: After topping the charts at a staggering $235 share price in late July (the stock went public at $25), Beyond Meat has finally fallen back to a level that J.P. finds palatable.
Here's what you need to know.
J.P. Morgan was against Beyond Meat before the analyst was for it
Two months ago, with Beyond Meat stock rapidly rising as it approached an earnings report that would show sales nearly quadrupling year over year, J.P. Morgan assigned a $120 target price. Beyond Meat then quickly eclipsed that target en route to hitting a 52-week high twice what the analyst thought it was worth.
That outperformance triggered a downgrade at J.P. Morgan. And yet, the analyst almost seemed reluctant to do the downgrade. The market for plant-based, meat-like food substances was probably going to grow to $100 billion in size, J.P. continued to argue, and its enthusiasm for this market "remain[ed] unchanged." If Beyond Meat could capture just 5% of global sales, it would be selling $5 billion worth of plant-based products within 15 years.
Despite this potential, however, J.P. Morgan worried: "At some point, the extraordinary revenue and profit potential embedded in BYND... will be priced in," and with Beyond Meat running past its price target in a matter of hours, not days, the analyst decided it was time to declare victory and go home, downgrading the stock to neutral.
A second bite at the artificial apple
Barely a month after J.P. Morgan's downgrade, Beyond Meat's share price would double again, and the analyst would resume looking for an excuse to buy the stock. It found that excuse on July 29, when Beyond Meat reported worse-than-expected Q2 earnings, and also announced a secondary stock offering in which its existing shareholders would be cashing out some 3 million shares at an offer price later set at just $160.
That announcement sparked a collapse in Beyond Meat's shares, which fell as much as 38.5% over the next few weeks. But it also gave J.P. its chance to rerecommend the stock.
Upgrading Beyond Meat
J.P. Morgan gave three main reasons for its decision to rerecommend Beyond Meat yesterday, namely:
- "The potential to acquire new food service customers" (i.e., restaurants adding Beyond Meat to their menus),
- "[c]ontinued strength in measured data,"
- and finally, "[v]aluation."
Does this argument make sense?
And really, I've got no quarrel with any of these points save the last one. Over the last month or so, we've seen everyone from Dunkin' to Blue Apron to Taco Cabana add Beyond Meat products to their menus. And as far as the "data" goes, did I mention that Beyond Meat grew its sales nearly four times in the space of a year?
Clearly, this is a popular product.
Where I do take issue with J.P. Morgan's upgrade is its assertion that overpriced Beyond Meat shares have a better valuation based on the fact that they've fallen nearly 40% from a previously even-more-overpriced $235. According to the analyst's latest write-up, Beyond Meat is worth $189 a share. That isn't quite as overoptimistic as the recent $235 price tag, granted. But at the same time, it's 50% more optimistic than the price target J.P. itself assigned just two months ago.
Essentially, what J.P. Morgan is saying here is that despite having no profits to its name (indeed, Beyond Meat's losses came in worse than expected last quarter, not better), and despite the fact that most analysts don't see the company turning profitable before 2024 at the earliest, the stock is not only worth the 55 times trailing sales that its $153 share price implies today -- but actually worth even more than that: about 68 times Beyond Meat's still-unprofitable sales.
This all seems to me a simply ridiculous argument. Beyond Meat is enjoying great sales growth, sure, but it's still selling a commodity product, and doing so in a field getting more crowded by the day. If the company can't earn a profit now, when it's got momentum (and headlines) working in its favor, I don't see how that's likely to change as competition increases.
And I don't see how, just because Beyond Meat is a bit less overpriced today than it was a month ago, this makes the stock a bargain -- or worth a buy rating from J.P. Morgan, either.