After Beyond Meat (BYND 0.16%) saw its stock lose over three-quarters of its value in 2022, investors can be forgiven for thinking the slide is drawing to a close. But they might be mistaken.
In 2023, the meat-substitute producer will face an uphill battle as it seeks to create value in a hugely competitive and low-margin industry. Let's explore two reasons it could continue to fail.
1. Its operational results are catastrophic
Beyond Meat was historically considered a growth stock because of its rapid expansion and potentially disruptive business model, but that thesis now seems to be breaking down.
Third-quarter net revenue dropped 22.5% year over year to $82.5 million amid extreme weakness in Beyond Meat's international segment as the global craze for plant-based meat replacements wanes and inflation bites into consumer purchasing power.
Beyond Meat might be letting some of its noncore operations wither as it focuses on generating cash flow and profitability instead of growth. But this will be much easier said than done.
As of the third quarter, the company's gross profit fell from roughly $23 million to a loss of $14.8 million. It now costs more for Beyond Meat to manufacture and distribute its products than can be recouped by selling them -- before accounting for easier-to-control operating expenses like marketing and research. The company's net loss almost doubled to $101.7 million in the period.
2. A weak moat against rivals
Beyond Meat's biggest problem is its weak economic moat, a term that refers to a company's ability to maintain a competitive edge over rivals to protect its market share and margins.
To be fair, management has done a great job branding its product as a better version of vegan meat. And it has secured partnerships with leading fast-food chains, including McDonald's, which rolled out its Beyond Meat-based Double McPlant across the U.K. and Ireland in January. But these efforts have done little to protect Beyond Meat against its biggest competitor: real meat.
Image source: Getty Images.
Real meat arguably tastes better and is significantly cheaper than Beyond Meat's plant-based alternative.
According to the Good Food Institute (a nonprofit focused on protein innovation), plant-based proteins are twice, four times, and three times more expensive than beef, chicken, and pork, respectively.
And according to CNBC, experts believe it could take five to 20 years for the products to achieve cost parity. Even then, the industry will have to contend with consumer tastes and well-established consumption habits that favor conventional proteins over plant-based substitutes.
Is bankruptcy a possibility?
Beyond Meat's operations are seriously burning cash, and it doesn't seem to have a clear path toward restarting profitable growth. This raises the possibility of failure or reorganization.
That said, with just $1.2 billion in long-term debt (compared to $390 million in cash), the company doesn't seem to be at immediate risk of folding.
Management can refinance loans to kick the can down the road. And Beyond Meat can rely on shareholder dilution (selling more stock) to raise capital.
However, with interest rates rising, thus increasing the cost of capital, such strategies may hurt investor value and prove unsustainable over the long run. Investors should give the company a wide berth until these core issues are convincingly resolved.
