Beyond Meat's (BYND +39.19%) stock sank 9% to a new all-time low on Nov. 9 in response to its third-quarter earnings report. The plant-based meat maker's net revenue declined 22.5% year over year to $82.5 million and missed analysts' expectations by $2.1 million. Its net loss widened from $54.8 million to $101.7 million, which trickled down to a loss of $1.60 per share and broadly missed the consensus forecast by $0.45.
Beyond Meat expects its revenue to decline 9% to 14% for the full year, which would be a significant slowdown from its 14% growth in 2021, 37% growth in 2020, and 239% growth in 2019. That ongoing deceleration, along with its widening losses, drove away the bulls and attracted a sloth of bears. But could Beyond Meat's steep decline also represent a long-shot multibagger opportunity for investors?
Image source: Beyond Meat.
Beyond Meat faces an existential crisis
Beyond Meat grew like a weed in 2019 as restaurants and retailers eagerly jumped aboard the bandwagon for plant-based meat products. But in 2020, the pandemic shut down restaurants and pushed budget-conscious consumers back toward cheaper animal-based meat products. That slowdown persisted throughout 2021, and was exacerbated by tough competition from Impossible Foods, Kellogg's Morningstar Farms, and Tyson Foods' plant-based meat division.
Beyond Meat initially thought its business would stabilize in 2022. During its first-quarter report this May, it predicted its revenue would rise 21% to 33% for the full year. But it slashed that guidance to just 1% to 12% growth in August, followed by another guidance cut last month, which was reiterated in its current outlook for a full-year decline.
Beyond Meat mainly blamed that decline on inflation, which caused shoppers and restaurants to buy cheaper animal-based protein instead of its plant-based products, as well as heightened competition. Those headwinds are also squeezing its margins by limiting its pricing power, forcing it to liquidate its excess inventories, and boosting its production and freight costs.
Its sales of Beyond Meat Jerky through a joint venture with PepsiCo, which generates much lower margins than its core refrigerated products, is applying additional pressure on its gross margin. Beyond Meat has also been paying some of its co-manufacturing partners, including PepsiCo, underutilization and termination fees for failing to produce and sell enough products.
That's why Beyond Meat's gross margin turned negative in the first nine months of 2022, compared to its positive gross margins of 25% in 2021 and 30% in 2020. It expects its gross margin to remain negative in the fourth quarter, but to also improve slightly on a sequential basis as it pays fewer underutilization and termination fees. But despite that slight improvement, its margins will likely remain negative and its losses should widen for the foreseeable future.
The bullish case for Beyond Meat's long-shot recovery
Beyond Meat's declining revenue, negative gross margin, and widening losses all strongly indicate the plant-based meat craze may be over. However, the company still believes its operating cash flow will turn positive by the second half of 2023 as it aggressively cuts costs and rightsizes its business. It already laid off more than a fifth of its workforce over the past 12 months, and it believes that reduction will lower its total operating expenses by about $39 million over the following 12 months.
The company also plans to liquidate more of its inventories, reduce its capacity to cut costs and address its underutilization fees, and continue to focus on its long-term development of new plant-based beef, pork, and poultry products.
During the conference call, CEO Ethan Brown said Beyond Meat would maintain its "unwavering focus" on the $1.4 trillion total addressable market for plant-based meat products. As for the competition, Brown expects a "shakeout" to occur as more of its rivals "either retreat or consolidate a less cluttered playing field."
Brown also believes plant-based meat products will achieve price parity with their animal-based counterparts over the long term, driven by economies of scale, better brand recognition, and a lower dependence on marketing campaigns and promotional partnerships.
NASDAQ: BYND
Key Data Points
In short, the next few quarters will be tough, but Beyond Meat still expects to be the last man standing in the plant-based meat industry. Unfortunately, its net loss nearly tripled year over year to $299 million in the first nine months of 2022, and it ended the third quarter with a mere $390 million in cash and equivalents as it shouldered $1.1 billion in outstanding debt.
In that context, a $39 million reduction to its annual operating expenses doesn't seem nearly aggressive enough. That's why the bears are still betting heavily on Beyond Meat's ongoing decline with a whopping 37% of its outstanding shares still being shorted as of Oct. 13. Beyond's enterprise value of $1.54 billion (which includes its debt) also still values the company at more than three times next year's sales -- so it can't be considered a screaming bargain yet.
Therefore, Beyond Meat looks more likely to drop to zero instead of more than doubling to reach its initial public offering price again. Investors should consider steering clear of this struggling fad stock and sticking with more reliable options like PepsiCo instead.
