Is Beyond Meat Stock a Buy?

Ask almost any analyst on Wall Street, and they'll tell you Beyond Meat (BYND -3.90%) stock is overvalued. Of the analysts tracked by TipRanks, only one would say Beyond Meat is a buy right now, but that analyst's price target is within 10% of where the stock currently trades. Therefore, even the lone bull would say near-term upside is limited today.

The Beyond Meat bears make some fair arguments against the stock that shouldn't be glossed over. But I believe they're overlooking important elements to this investment story. 

Beyond Meat plant-based burgers. Image source: Beyond Meat.

The case for not buying Beyond Meat stock

Beyond Meat makes plant-based meat substitutes. Many consumers believe these can help mitigate climate change, and some believe plant-based proteins are a healthier way to eat since they reduce the consumption of cholesterol, among other things. The company estimates the global animal-protein industry at $1.4 trillion, so there's plenty of upside as plant-based meat substitutes grow in popularity.

But this trend is still young. Generally speaking, early-stage trends can suddenly turn in new directions, working against the companies with an early lead. For example, consider that Singapore just approved cultured meat, which differs from plant-based meat in that it is grown from real animal cells in a lab. The cost of cultured meat is still exorbitant, lowering the immediate threat to Beyond Meat. But it does illustrate how the industry might fundamentally shift away from Beyond Meat's products in time.

There's another problem. Amazon founder Jeff Bezos once said, "Your margin is my opportunity," illustrating how some companies undercut prices to gain market share. And many analysts see a price war brewing for plant-based players. Beyond Meat rival Impossible Foods has already slashed its prices by 20%. And with the growth of the alt-meat market, more companies than ever are jumping in, threatening to commoditize the space. If Beyond Meat responds with price cuts of its own, it may do so at the expense of profits.

Lastly, Beyond Meat stock isn't a bargain at these levels by any stretch of the imagination. Shares trade around 25 times trailing sales and over 1,000 times forward earnings estimates. Investors clearly expect robust, profitable long-term growth if they're willing to pay such a high price. But the aforementioned factors call this optimism into question.

The case for buying Beyond Meat stock anyway

Management doesn't conceal its desire to cut prices; it intends to get the price of at least one product below the price of animal protein by 2024. When you cut prices, gross margins suffer -- unless, that is, you proportionately lower your cost of production. Many analysts overlook the company's progress in lowering its cost of goods sold. Consider how well gross margins held up with Beyond Meat's price cuts to date.

Source: Beyond Meat filings.

As the chart shows, Beyond Meat's gross margin rose until 2020, but this recent hit isn't due to the company lowering prices. When COVID-19 closed restaurants, product destined for its food-service partners had to be repackaged for grocery stores; some product was even thrown out. And the company incurred extra labor expenses to reroute various items. Therefore, this margin hit is temporary.

Talking to CFO Mark Nelson about underpricing animal protein by 2024, CEO Ethan Brown said, "I have promised him that I'm not going to reach this goal at the expense of his margin." Beyond Meat plans to lower prices as it lowers the cost of manufacturing.

With under $0.5 billion in trailing-12-month revenue, there's plenty of room for Beyond Meat to grow sales in the $1.4 trillion meat industry long term. And there are potential upside catalysts in coming years including new products, new restaurant partners, and even the possibility of entering new product categories. For example, plant-based chicken substitutes still aren't commercially available. And imagine Beyond Meat's prices actually falling below animal protein. Sales could surge when cost is no longer a hindrance.

Image source: Getty Images.

This stock requires some risk tolerance

I'm not going to tell you Beyond Meat isn't a risky investment; it is. Therefore, it's up to you to ask if your portfolio can support a riskier stock. If your risk tolerance is low or you're already overinvested in riskier assets, then perhaps you need safer stocks than Beyond Meat.

But if you're up for a little risk, Beyond Meat is a stock to buy, in my opinion. Just be prepared to hold for a very long time; I assume this could take five to 10 years to play out in a big way. Since time is on your side, there's no need to rush into a position. This could be a great stock to use dollar-cost averaging, investing small amounts at regular intervals to smooth out volatility.