When Beyond Meat (BYND 1.90%) was going public, no one expected the stock to quadruple soon after the IPO. But Beyond Meat's stock surpassed everyone's expectations. Based on its price to sales ratio at the time of writing this article, the company has to grow its revenue by more than 40 times to justify the current valuation. It's not difficult to understand why currently close to 10% of Beyond Meat's shares available for trading are shorted.
But as investors, sometimes it pays to take a contrarian approach. Can we imagine a reasonable path for Beyond Meat to grow its revenue by 40 times, or even higher? Let's dig deeper into three ways Beyond Meat can surprise everyone once more and grow into its seemingly absurd valuation.
Image Source: Getty Images
The market opportunity is large enough
In the company's initial public offering document, Beyond Meat announced that it is focusing on the meat industry's $1.3 trillion market opportunity. In contrast, its estimated revenue for the fiscal year 2019 is slightly higher than $200 million. Is the market opportunity large enough for the company to grow 40 times? Let's do the math: $200 million X 40 = $8 billion. In other words, we need to investigate whether the market opportunity is large enough for Beyond Meat to sell $8 billion worth of plant-based meat. $8 billion is quite a large figure, but it only represents 0.6% of the global meat industry. Taking a 0.6% market share in such a large market is certainly possible.
It has been done in the past
Now that we know how much the company has to generate to justify its valuation, is it possible to generate that much revenue for one company? One way of answering this question is to explore and find similar food producers with around $8 billion in revenue. We'd want to find a food producer that can generate such sales volume from only one product.
For that, let's take a look at Tyson Foods (TSN 1.59%). This company is a global food producer with beef, chicken, and pork as its primary product lines. It was also once an investor in Beyond Meat. But it's now planning to compete with the newcomer by launching its own line of plant-based meat. Putting aside the two company's past history, Tyson Foods' revenue by segment has the answer we are seeking. In 2018, Tyson Foods' beef, chicken, and pork revenue were $15.5 billion, $12.0 billion, and $4.9 billion, respectively. Of course, Beyond Meat has a long way to go before it can achieve Tyson Foods' scale. But with beef as Tyson's largest and most lucrative segment, it's possible to imagine that consumers might want yet another beef or beef-similar product from a trendy up and comer like Beyond Meat. Generating $8 billion in sales may not be as far off as we think.
Consumer tastes can change
The next logical step is to question whether consumers are willing to switch to plant-based meat. So far, we have seen that the market opportunity is large enough, and other companies have been able to generate enough revenue from a single type of product. But will consumers accept the change and open their wallets to pay for a new source of protein? To answer that question, let's take a look at the curious case of craft beer.
Consumption of craft beer in the U.S. has almost tripled in the last decade. In 2010, craft beer had a 5% market share in the U.S. beer market. Fast forward to 2018, craft beer's market share has almost tripled to 15%. In less than a decade, consumers' tastes and preferences in beer have evolved drastically.
Data source: Statista. Chart by Hoda Mehr.
Consequently, craft beer has been a noteworthy investment in the last eight to 10 years. For example, shares of Craft Brew Alliance (BREW +0.00%) were $2.4 per share at the beginning of 2010. By the end of 2018, the stock price was up to more than $14 per share. That's an astonishing 5.8 times growth in less than a decade.
Chart: YCharts
Consumer tastes can change, and when they do it creates a significant investment opportunity. The transition from beloved classic brews to more artisan beers makes it easier to imagine that consumer taste can change in other segments as well. There is a growing consumer preference for plant-based food. In its S1 document, Beyond Meat posits that its consumers want to enjoy traditional dishes they have always consumed while feeling good about the quality and sustainability of the ingredients. Such shifts in preferences can drive the change from animal-based protein to the plant-based alternatives, even faster than what has happened in the craft beer industry.
Beyond Meat may surprise everyone, once more
There is a reasonable path for Beyond Meat to grow into its current valuation. It's may be very hard, take a significant amount of capital, and quite a lot of luck. The company has to find the operational scale to produce a lot more plant-based meat compared to its current production volume. However, the enormous market opportunity, comparable performance by other sources of protein, and the possibility for a shift in the consumers' taste are three reasons to consider when questioning Beyond Meat's future valuation.
