Investors have high expectations for Beyond Meat (BYND -9.13%), with shares having more than doubled through the first half of 2020. The plant-based meat specialist was considered a promising growth stock even before the COVID-19 pandemic created new supply and demand challenges for meat-processing giants like Tyson Foods.
But does it make more sense to buy Beyond Meat today and trade exposure to all that potential growth against some huge execution and valuation risks? Or are investors better off owning Dunkin' Brands (DNKN), an already profitable business that distributes a few of Beyond Meats' hit products?
Let's look at the two biggest reasons to prefer the fast-food chain as the better stock purchase.
Beyond Meat is risky
The businesses are in different industries and at far different points in their maturity, which means it's not useful to compare their operating metrics. But it's no stretch to say that Beyond Meat's main draw is its sales growth potential.
The company last reported a 141% sales increase as revenue jumped to $97 million. Dunkin' Brands announced a slight decrease, on the other hand, with Q1 sales dropping to $2.76 billion from $2.78 billion a year ago.
Yet Beyond Meat stock comes with drawbacks that don't apply for Dunkin' Brands investors. The biggest is risk, which is best illustrated by the concentration of the plant-based meat specialist's business.
The company's signature Beyond Burger accounted for roughly two-thirds of its sales last year, and that total revenue haul was just $300 million. Anything that threatens that product, including introductions of similar meat substitutes by deep-pocketed consumer foods conglomerates like PepsiCo or Kraft Heinz, could sink the entire business. That risk is amplified by the fact that Beyond Meat hasn't generated an annual profit in any of the last three years and is targeting an unproven market segment.
Dunkin' Brands, meanwhile, has a long history of profitable growth in the mature fast-food industry. It operates under the same franchising model that has allowed giants like McDonald's to generate ample cash flow and impressive returns for investors over decades. The chain has a global presence and a well-recognized brand. And it can easily adjust its menu to reflect shifting consumer tastes, most recently into areas like espresso-based coffees and premium breakfast sandwiches like the Beyond Sausage sandwich.
Beyond Meat has a high bar to meet
With sales more than doubling in recent months, it's impossible to say that Beyond Meat is obviously overvalued. A few years of growth at that scale would reduce valuation metrics like price-to-sales, which today sits at a whopping 26 compared with Dunkin' Brands' 3.9.
Still, there's no denying that buying Beyond Meat today means paying for several helpings of optimism. In just the last six weeks, shares have soared for reasons including the COVID-19 disruption of animal processing plants, the chain's plan to push deeper into the Chinese market, and lower-priced burger options. Those moves seem to go past grounded confidence and into the type of "cheery consensus" that billionaire investor Warren Buffett says reduces investors' returns.
Neither of these concerns mean Beyond Meat is a bad investment even after shares have doubled this year through mid-June. It is a leading brand in an industry that will likely soar over the next few decades. But investors should know that the stock has big risks attached to it, and they should allocate any share purchase with that drawback in mind.