There is far more appeal for Beyond Meat (BYND 9.50%) and its plant-based beef alternatives than I thought existed almost one year ago. Some of the risks I highlighted then still exist, but the protein-substitute producer has mitigated others, while an elevated valuation remains a constant.
Let's look at Beyond Meat's business to see whether it has grown into that valuation and if investors should buy its stock, let alone its beef substitutes.
The first area I looked at last year (and got wrong) was the limited opportunity a pea-protein-based burger had. Although I acknowledged a mass market could exist for Beyond Meat's patties, I saw it constrained as being a vegan/vegetarian offering.
Beyond Meat itself never advertised its products so narrowly for the consumer market, and it has been able to expand product placement beyond the tofu aisle. Indeed, in my local supermarket, Beyond Meat products are displayed in the meat case, albeit segregated, perhaps to avoid confusion.
And the retail segment continues to grow, with U.S. sales up 157% last quarter while growing 57% internationally. It may have even gotten a boost from the coronavirus pandemic. COVID-19 led to shutdowns at beef processing facilities, resulting in shortages of real meat in supermarkets. It was temporary, but it may have lasted long enough for consumers to sample Beyond Meat products they might not have ordinarily tried.
The restaurant business was constrained by the pandemic, but it still saw a 156% rise in U.S. sales in the food service segment, and revenue doubled overseas. Beyond Meat has also launched several new global partnerships that should help it expand international sales further.
It announced two new facilities in the Netherlands to produce and texturize its beef alternatives, helping it to more easily reach European consumers, and it also just signed a distribution deal with a Chinese partner to get its products to restaurants, wholesalers, and hotels in the country.
A crowded market
The other big issue I saw confronting Beyond Meat was the growth of competition. Impossible Foods has been its primary rival, and has proved arguably more effective at getting its beef substitutes into restaurants than has Beyond Meat, and it now sells its burgers directly to consumers.
There are other, bigger consumer-product companies that have launched competing substitutes, including Nestle and Tyson Foods, as well as retail outlets like Kroger (KR 2.17%), which is introducing its own line of plant-based burgers in its supermarkets.
Some analysts see a burgeoning $4 billion market developing for meat substitutes by 2026 (others have exponentially larger projections for the plant-based protein market), indicating there's plenty of room for many players, but that will also challenge Beyond Meat's ability to charge a premium price for its products.
Impossible Foods has begun discounting its prices, and while that could be an attempt to gain market share and grow its customer base, it also points to a future of constrained profits.
Right now, Beyond Meat (along with Impossible Foods) has first-mover status, and it is scaling up production, even to a global level. That helps naturally reduce costs through economies of scale, but introduces new expenses and challenges at the same time. Beyond Meat is profitable, but because margins are so thin, it may be hard to maintain that.
So is it a buy?
My assessment last year acknowledged there was more than a niche market for Beyond Meat, but not at any price. While it has since proved the opportunity is far larger than I gave it credit for, the valuation picture hasn't changed.
Beyond Meat closed last Friday at approximately $144 a share, which is 25 times its sales and well above most other packaged-food companies' valuations. It has a good future, but still seems too expensive to warrant buying in at these levels. So as I cautioned investors last year, I'd wait before taking a bite of Beyond Meat's stock.