What do you call a growth stock that's not growing? I can think of a lot of things, but a good investment isn't one of them. Shares in plant-based meat alternative provider Beyond Meat (BYND 0.27%) have fallen 77% year to date. And the decline looks far from over because of the company's deteriorating financials and entrenched challenges in the alternative meat industry. Let's discuss three reasons it might be time for investors to jump ship.
1. Revenue is "growing" backward
When Beyond Meat went public through an initial public offering (IPO) in 2019, its stock was widely considered a growth stock -- one with an above-average growth rate. Revenue jumped by an eye-watering 275% to almost $307 million that same year. But now, three years later, Beyond Meat's bull thesis has turned upside down as its top-line trajectory has begun moving in the opposite direction.
In the third quarter, Beyond Meat saw its net revenue drop roughly 23% to $82.5 million amid challenges like inflation and changing consumer preferences, which seem to be altering the market for its products.
Image source: Getty Images.
While revenue stagnation is not the end of the world for mature and profitable companies, it can spell doom for younger ones that often rely on their rapid growth to make up for unprofitability. And Beyond Meat is deeply unprofitable, with an operating loss of $89 million in the third quarter. The company will have a hard time fixing this problem because it has a small moat in a hugely competitive industry.
2. Beyond Meat has a narrow moat
The term "economic moat" refers to a company's ability to sustain a competitive advantage over rivals, allowing it to protect its long-term market share and profitability. Beyond Meat's moat is incredibly narrow. Not only are there more than 60 rival brands competing in the meat-alternative industry, but natural meat remains a cheaper -- and, depending on who you ask, perhaps tastier -- alternative.
Further, the health benefits of plant-based meat substitutes are not well established. While these products contain less cholesterol than regular meat, they are high in saturated fat and sodium, which can be unhealthy for some people, according to research from Harvard University.
These mounting industry headwinds could severely impact Beyond Meat's ability to achieve either revenue growth or profits in the future. Goldman Sachs analyst Adam Samuelson cited weakening consumer demand and high prices (relative to natural meat) as reasons he cut the company's share price target from $14 to $5 (compared to its recent trading price around $16).
3. Beyond Meat's valuation is still too high
Its share price crashing by more than three-quarters in less than a year might make Beyond Meat stock attractive to bargain hunters. And with a price-to-sales (P/S) multiple of 2.07, it is valued significantly lower than the S&P 500 average of 2.37. But a cheap stock isn't always a good deal. With a toxic combination of falling sales, spiraling losses, and no clear pathway out of the mess, I wouldn't recommend Beyond Meat stock at any price.
