No, Beyond Meat (NASDAQ:BYND) is not one of the worst performers this year. Actually, shares have rebounded over 200% from their March low and are up 149% year to date as of this writing. The maker of plant-based meat alternatives has been rapidly expanding internationally, and revenue grew by double-digit percentages, even during the early stages of the coronavirus pandemic when economic activity was at its most constrained.

In spite of this, I favor selling the shares. Why? Let's take a closer look at Beyond Meat today and the main challenge that could weigh on its growth -- and its stock price -- in the future.

An investor holds up a sign saying "time to sell."

Image source: Getty Images.

Cooking at home

Beyond Meat is a leader in the plant-based protein market. It sells an array of faux meat products to consumers through supermarkets, and more recently through its website. The company is also growing its international presence. Earlier this month, for instance, it announced an agreement to manufacture its products in China for distribution in that region.

But the maker of the Beyond Burger also has a lucrative foodservice business, selling to restaurants and other clients such as universities. This part of the business generated the majority of sales prior to the coronavirus pandemic, but it suffered due to temporary restaurant shutdowns across the world.

Still, sales growth through the retail segment somewhat made up for that shortfall as consumers did more cooking at home -- total revenue rose 69% year over year in the fiscal second quarter as retail sales nearly tripled to $99.6 million. I say "somewhat" because even that seemingly strong performance was far from the triple-digit top-line growth the company had previously made a habit of reporting. In the fiscal first quarter, for example, total revenue climbed 141%.

I expect the foodservice segment to recover as restaurants and other customers return to normal operations. The process may be slow, however, as most restaurants are not yet back to serving customers at full capacity. That isn't my main concern, though.

What I'm most worried about is direct competition -- now and on the horizon -- from food industry giants, including Tyson, Perdue, Nestle, and Kellogg. And in the future, new innovations such as meat grown organically from animal cells could represent a threat to the company too. Startup Memphis Meats is already working on that technology.

According to Markets and Markets' forecast, the plant-based meat market will grow at a 15% compound annual rate in the next five years and hit $27.9 billion by 2025. With a market that size, there will clearly be room for several players. And that's the problem. Beyond Meat may have trouble standing out in this crowd. Food industry giants, due to their resources and capacity, will find it easier to lower costs -- and therefore prices on the product -- than a smaller specialized player like Beyond Meat. 

Today, Beyond Meat's closest rival is Impossible Foods, maker of the Impossible Burger. These two companies are the top players in the worldwide plant-based meat alternatives market, according to a Markets and Markets report.

Both companies have recognized the importance of pricing as they try to attract a broad swath of consumers. In March, Impossible Foods cut its prices to distributors by 15% and reiterated its goal of eventually undercutting the price of traditional ground beef. Meanwhile, Beyond Meat has pledged to achieve price parity with animal protein in at least one product category by 2024.

Investing in innovation

In its efforts to remain on top, Beyond Meat is investing heavily in innovation. In the second quarter, for instance, research and development costs climbed 43%. R&D spending represented 5.3% of revenue -- a smaller percentage than the year-earlier period when it represented 6.3%. Still, in its 2019 earnings report, management said the company would keep prioritizing R&D initiatives, so it's likely these expenses will continue to grow. If Beyond Meat can resume triple-digit revenue growth and become profitable more regularly on a quarterly basis, R&D spending won't be much of a problem. These costs will remain a small percentage of revenue. However, R&D spending could be worrisome if revenue growth slows. Beyond Meat spends on refining the taste, texture, appearance, and aroma of the type of meat the particular plant-based product aims to replace, none of which are presumably cheap ventures. 

With competition now and on the horizon, long-term profit growth and margins are a concern. And today's share price doesn't seem to reflect that concern as it has marched higher and higher. So high, that it's surpassed analysts' average price target. If Wall Street is right, the shares may fall 25% from their current level within 12 months.

Considering the competitive landscape and today's share price, if I'd invested in Beyond Meat around its market debut last year or even early this year, I would celebrate its strong market performance thus far -- and then sell the shares and move on to other investing opportunities.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.