Beyond Meat Inc (BYND +3.51%) investors have been in awe of the company's ability to grow since its IPO. Revenue was up 250% in the third quarter of 2019 to $92.0 million, an incredible pace for any company. But it's still expected to lose money in 2019 and shares trade at 17 times full-year expected revenue, a hefty premium for growth.
Given the competitive landscape in food and the low-margin nature of the business, I think investors should look at a company that may have a more durable growth path. And I think Spotify (SPOT +3.75%) is the stock that has a lot going for it in 2020.
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Beyond Meat's long-term challenge
It's difficult to argue with Beyond Meat's results over the last twelve months. The company has grown extremely quickly and is even reporting a small profit as of last quarter. Deals with Hardee's, Tim Hortons, KFC, and other fast-food chains drove growth this year, but there's competition coming to the plant-based food industry.
More than half a dozen well-capitalized companies are introducing their own plant-based products, including Tyson Foods (TSN +2.61%), Kellogg (K +0.00%), and Kroger (KR 0.67%). That's on top of Impossible Foods, the other venture-backed meat alternative company that's partnered with Burger King.
The traditional names are well-established players in the food business, and that's the problem for Beyond Meat. The food business is driven by distribution, whether that's to grocery stores or restaurants. Food suppliers don't have a lot of power because they don't sell directly to customers and are typically not very high margin companies, even for well-known brands, as you can see below. Despite increases in margins over the past year, I wouldn't be surprised to see margin pressure in the future.
BYND Gross Profit Margin data by YCharts
Beyond Meat's challenge will be keeping up growth and margins as competitors enter the market. And when going up against much larger rivals, I am skeptical the company can live up to investors' lofty expectations.
Spotify is set up to expand its market
Unlike food where hundreds of companies fill store shelves, Spotify is playing in more of a winner-take-all market. The intermediary between music creators and music listeners has proven to be a valuable position now that customers are paying for monthly streaming subscriptions. Spotify effectively owns the customer relationship and then makes deals with music studios to buy content. And as the biggest game in town, the studios have almost no choice but to be on Spotify's platform. As the number of customers grows, Spotify becomes a more powerful and more important customer for music producers. And it becomes more attractive for customers as well.
What I like about Spotify's strategy is that it's leveraging its music position into podcasts, which are a booming business right now. The company spent $340 million early in 2019 to acquire podcast start-ups Anchor and Gimlet in order to grow its presence in the segment. It may take years to show fruit from the podcast investment, but I think it's the right place to be right now.
The combination of music and podcasts means Spotify is at the center of what we'll listen to in the future. And as a platform company with very few competitors that have been able to scale, I think that will be a profitable place to be. That's why I think Spotify is in a better strategic position than Beyond Meat for growth investors.
Plenty of growth with these stocks
Both Beyond Meat and Spotify have bright futures with a lot of growth ahead, but I like Spotify's strategic position and value much better. It could be the dominant player in music and podcasts for the next decade and it trades at just 4 times sales, compared to 17 times sales for Beyond Meat. That's a better deal for investors today, although both stocks could be winners over the next few years.
