Earth's population recently surpassed 8 billion people, which underlines the importance of new and sustainable resources. Plant-based foods are a growing alternative to meats -- and according to Brand Essence Research, these products represented a $42 billion market in 2021 and could grow to $94 billion by 2028.
Beyond Meat (BYND 0.31%) was one of the first movers in the space and an early entrant to the public markets. However, the stock has left a bad taste with investors; it's down nearly 70% since its initial public offering (IPO).
The stock market's been quite bearish over the past year, and Beyond Meat isn't the only stock to see its share price plummet. However, there are some fundamental concerns that the company should address before you put your hard-earned money to work in its stock.
Plunging profit margins are a big problem
Plant-based meat might be a growing industry, but that doesn't promise a lucrative investment opportunity. Beyond Meat's business is facing severe challenges, starting with plunging gross profit margins. You can see below that margins were as high as 36% but have steadily turned negative over the past several years.
Management has attributed its declining margins to several factors, including weaker-than-expected demand (resulting in price reductions); inflation of manufacturing, material, and logistics costs; and one-time termination costs associated with Beyond Meat Jerky.
BYND Gross Profit Margin data by YCharts
Gross margins only account for direct costs and don't include additional expenses like overhead for the company. You can see that free-cash-flow losses have ballooned due to the company's poor margins. Management is working to make the business cash-flow-positive by the second half of 2023, but it remains to be seen how successful that will be given the apparent lack of pricing power.
Problems made worse by generous compensation
Growing companies often compensate employees with shares of stock to conserve cash; however, too much stock-based compensation can dilute investors. Increasing the number of outstanding shares is like slicing a pie into increasingly smaller pieces, with each slice representing a smaller portion.
BYND Stock Based Compensation (TTM) data by YCharts
Above, you'll see that Beyond Meat's stock-based compensation has grown much faster than its sales. That's a potential red flag that shareholders are getting diluted, which will only hurt investment returns. Remember that a stock's valuation is often based on earnings per share. More shares mean fewer profits per share of stock and a lower share price.
Beyond Meat could be a value trap
Today, Beyond Meat is trading at a price-to-sales ratio of just 3, its lowest since going public. But does that mean the stock is cheap? A stock might be attractive if the valuation declines despite steady business fundamentals. But since Beyond Meat's sales are declining, profit margins are negative, and the share count is increasing, it's hard to argue against the stock's lower valuation.
BYND PS Ratio data by YCharts
Investors should resist the temptation to buy what they think could be a bargain simply because the stock is down from where it once traded. Consider waiting for the fundamentals to head in the right direction first; if you miss out on some of the rebound, so what? You should still have room for investment returns if Beyond Meat is a growing, healthy company over the long term.
