Based on how shares of Beyond Meat (BYND) reacted to its third-quarter earnings report, you'd think the plant-based "meat" company hit it out of the park. The stock surged more than 20% in the two days following that Nov. 9 report.

Beyond Meat did not hit it out of the park. To put it plainly, the third-quarter report was a catastrophe. Demand for plant-based meat, and specifically Beyond Meat's products, is plunging as consumers abandon the pricey meat alternatives. At the same time, Beyond Meat's costs are out of control. Gross margin is deeply negative, and multiple rounds of layoffs will only go so far in bringing down operating expenses.

Beyond Meat is a company in distress. Unless you're willing to bet on an unlikely comeback, stay away from the stock.

What's going wrong for Beyond Meat?

Pretty much everything. Household penetration for plant-based meat is in decline, and the number of options has exploded. " the current environment, we are not seeing this benefit of competition, instead more companies are pursuing the same or fewer consumers," said Beyond Meat CEO Ethan Brown during the earnings call.

Whether or not demand for plant-based meat eventually bounces back is an open question. There's a decent chance, in my opinion, that plant-based meat was a fad. But even if industry sales stage a recovery down the road, Beyond Meat must be able to survive until then.

At the moment, time is not Beyond Meat's friend. The company's fixed costs related to manufacturing are being spread across fewer units, and it's contending with underutilization and termination fees from manufacturing partners. It cost Beyond Meat $5.60 per pound to manufacture its products in the third quarter, up from $4.19 per pound in the same period last year.

As costs per pound rise, the revenue Beyond Meat is able to generate per pound is tumbling. Overall, net revenue per pound dropped 11% in the third quarter, driven by price reductions, increased trade discounts, and changes in foreign exchange rates. Beyond Meat's gross margin was negative 18%. Even backing out one-time fees related to manufacturing, gross margin was still negative 9.2%.

If Beyond Meat's brand meant anything to consumers, the company would be able to raise prices to at least partly offset rising costs. But it's clear now that Beyond Meat has no pricing power at all. In fact, the company is being forced to cut its pricing as demand plummets. That's what happens when you sell a commodity product.

Beyond manufacturing costs, Beyond Meat's operating expenses are still too high. Total operating expenses were $74.9 million in the third quarter, compared to $82.5 million of revenue. The latest round of layoffs was conducted in October, so the third-quarter report doesn't reflect those cost savings. The company expects the layoffs to reduce annual operating expenses by $39 million.

Even with those cost reductions, Beyond Meat is in a deep hole. Net loss was $101.7 million in the third quarter. The company would have lost money even if it had no operating expenses at all.

A turnaround is a longshot

Beyond Meat needs the plant-based meat industry to recover, and soon. The company is taking steps to bring down manufacturing costs, but there's only so much it can do. Beyond Meat is actually testing further price reductions in some segments in an attempt to close the pricing gap with real meat, but this assumes the only problem is pricing.

Based on its current burn rate, Beyond Meat will run out of cash in about a year. Layoffs, other cost-cutting measures, and raising cash by reducing inventories can extend this timeline. The company had $390 million in cash at the end of the third quarter, but its free cash flow through the first nine months of 2022 was a loss of $330 million.

Beyond Meat is aiming to become free-cash-flow-positive by the second half of next year, and the company will have more to say about the details of that plan when it reports its fourth-quarter results. It's hard to see this happening if demand for plant-based meat doesn't improve. It's also hard to see it happening in general. The company has never produced positive free cash flow, even when things were going well.

Even with the post-earnings rally, Beyond Meat stock is down 92% from its all-time high. There's a good reason for that. Beyond Meat is burning cash, overloaded with inventory, facing intense competition, has a bloated cost structure, and is facing tumbling demand from consumers. It's hard to turn around a ship when it's already full of water.