With its share price down 79% year to date, Beyond Meat (BYND 1.78%) has clearly been a victim of 2022's bear market. While demand for plant-based meats is growing at a good clip, the company's lack of product differentiation may be preventing it from achieving the growth and margins it needs.
Here's why I think it's time to sell the stock.
Underperforming expectations
Analysts at market research company Facts and Factors have forecast that through 2028, the global market for plant-based meats will grow at a compound annual rate of 15% to $15.8 billion, due in part to people's increasing health consciousness and concerns about animal welfare. But even though it's a well-recognized brand in its niche, Beyond Meat has been reporting lackluster performance.
In the third quarter, its net revenue fell by 22.5% year over year to $82.5 billion amid a collapse in international retail and food service sales (which were down by 52.3% and 42.2%, respectively). That poor showing was exacerbated by macroeconomic factors such as the strengthening U.S. dollar, which cuts into the value of foreign-earned revenue.
But Beyond Meat also faces a more fundamental and long-lasting problem: its lack of a competitive moat. It has little ability to differentiate its products from rivals, and there's nothing preventing other food companies from pushing into its space.
Unlike smartphones, for example, meat -- both the animal- and plant-based varieties -- is largely a commodity product, and consumers of it are most concerned with getting value for their money. And while Beyond Meats' branding efforts do help it stand out from the crowd to an extent, its products still must compete with real meat in terms of flavor and pricing.
According to industry experts cited by CNBC, it could take five to 20 years for plant-based meat products to reach price parity with the real deal. Flavor parity is another challenge (although how much of a challenge depends on who you ask). Further, the plant-based meat industry has few barriers to entry. There are now more than 60 rival brands competing for market share. All of this will keep the pressure on Beyond Meat's margins.
Profitability is nowhere in sight
In the third quarter, Beyond Meat's net loss jumped 85.5% year over year to $101.7 million. And while it isn't uncommon for growth-focused companies to be unprofitable until they fully scale their business models, Beyond Meat has a deeper problem. Unlike the typical growth company, it isn't growing.
Worse still, it generated a gross loss of $14.8 million. In other words, it cost Beyond Meat more to produce and ship its plant-based meat than it could recoup by selling it -- even before accounting for management salaries, research, and other operating expenses.
Image source: Getty Images.
This is a shockingly bad situation that suggests Beyond Meat has no clear pathway to profitability unless the food market's dynamics radically change.
In October, Beyond Meat announced plans to lay off 19% of its workforce (roughly 200 workers) to reduce operating expenses. That said, the company will have significantly less luck improving its gross margins because those depend on factors like raw material costs and consumer spending patterns, which management has no control over.
The valuation could get lower
Given that the stock has lost more than four-fifths of its value in less than 12 months, investors might assume Beyond Meat's crash is over. That's not necessarily the case. It's trading at a price-to-sales multiple of 2.25, which isn't much below the S&P 500's average of 2.35. And that actually makes it quite pricey when considering its limited growth prospects and weak margins.
Investors should avoid Beyond Meat stock now because the risk of further share price declines remains real.
