Imagine eating a veggie burger that actually tasted good. For the carnivores out there, it's hard to fathom. But that's exactly what Beyond Meat (NASDAQ:BYND) claims to offer with its unique, plant-based simulated beef. While the concept is a hard sell to die-hard meat lovers, fast-food restaurants are taking note.

Denny's (NASDAQ:DENN), a U.S. based restaurant operator, is giving Beyond Meat a chance. The diner announced Monday that it will be adding the company's vegetarian burgers to over 1,700 locations in the U.S. and Canada. Beyond Meat's stock was down 3.3% since the news and Denny's stock is flat from Monday. 

But despite the tailwinds, Beyond Meat is working in a very competitive space with a small moat. And the company's valuation has attracted a large short interest (over 20% of its float). Will the simulated meat seller's breakneck revenue growth and improving fundamentals finally put its critics to rest? The Denny's deal suggests the answer is yes. 

The Beyond Burger

Image Source: Beyondmeat.com

Partnerships are the key to Beyond Meat's long-term growth

Vegetarian burgers are nothing new or revolutionary. The only things that separate Beyond Meat's offering from the bean and mushroom menageries in your local supermarket are its partnerships and brand recognition.

Granted, the company is known for closely mimicking the texture of real beef through the use of plant proteins and a beet extract that resembles the "bleeding" effect of real meat. But while these innovations are unique, they can be replicated -- or even improved upon. For example, Impossible Burger, Beyond Meat's privately held competitor, resembles the taste of beef by using plant-based heme. Heme is the chemical said to make meat taste like meat. 

Beyond Meat's success in the market for meat substitutes will depend on its ability to build partnerships with restaurants and distributors -- using its first-mover advantage to position its brand ahead of the competition. The company is meeting great success in this aspect of its business, having already secured partnerships with KFC, Subway, and many others in the fast-food industry. 

First-mover advantage

As a publicly traded company, Beyond Meat may have more access to capital than its privately held rivals that may be unable to scale up production to meet the demand of larger clients. For example, Impossible Foods, Beyond Meat's privately held competitor, recently announced that it would be unable to produce enough imitation meat to supply McDonald's (NYSE:MCD)

On the other hand, Beyond Meat's recent partnership with Denny's suggests the company will not have problems fulfilling large client demands. This may make it the partner of choice for restaurants looking to expand their vegetarian offerings. Beyond Meat is also moving forward with McDonald's trials in select locations, an opportunity worth up to $325 million in sales, according to UBS. 

Growth continues at a breakneck pace

Beyond Meat grew its revenue to $92 million in the third quarter -- a staggering 250% increase over the prior-year period. Even more notable is the company's improving fundamentals and rapid accent to profitability. Gross margins increased from only 19% of revenue to 35.6% year over year. The company also generated its first quarterly earnings at $0.06 per share in the third quarter, which was reported on Oct. 28. 

But what about its valuation?

Beyond Meat trades at a P/S ratio of 27, meaning its market cap is valued at 27 times revenue:

Chart

Image Source: YCharts

While this is a large revenue multiple, it makes much more sense when investors consider Beyond Meat's rapidly expanding top line. For example, if sales double, the P/S ratio will fall by half. As the above chart shows, Beyond Meat's P/S ratio has already fallen significantly due to its breakneck revenue growth over the last several months.

Critics may be disappointed

Beyond Meat enjoys a large top-line valuation. But the company's generous multiple is justified because of its massive revenue growth and improving fundamentals. Sales are growing at triple digits while margins also improve at a respectable clip.

The imitation meat maker still has a sizable short interest from, presumably, doubtful meat-eaters who may fundamentally disagree with its product. But if Beyond Meat continues to generate sales at its current rate, the vegetarians will be laughing all the way to the bank.