Beyond Meat (BYND +13.22%) stock has been off to a hot start this year, soaring 35% already in 2023. However, that still doesn't make up for its 81% decline last year. And there is considerable risk with the plant-based meat company moving forward as its financials aren't great and its growth has been nonexistent -- revenues were down 7% through the first nine months of 2022. Here's what needs to happen for Beyond Meat stock to continue to jump higher and for it to be a good buy this year.
1. Cash flow needs to be much better
A big problem for Beyond Meat right now is that the company isn't generating money from its day-to-day operations. If a business isn't bringing in cash, that means its operations aren't sustainable and it'll likely have to resort to issuing debt or selling more shares to fund its business. And over the past few years, Beyond Meat has been consistently in the red.
BYND Cash from Operations (Quarterly) data by YCharts.
When it released its third-quarter results back in November, the food company said it was anticipating that its operations would be cash flow positive in the latter half of 2023. If it achieves that, it will be a great sign that the business is on the right track and improving its operations.
2. The company's gross margin needs to be higher
A big part of the reason Beyond's business in unprofitable and burning through cash is that its gross margins simply aren't high enough. When your gross margin is negative, that means you're effectively selling your products at a loss. And that's before taking into account overhead and expenses that aren't related to production. That gives a company no chance at turning an operating profit; over the past three quarters, Beyond Meat has incurred a loss of $299 million.
BYND Gross Profit Margin (Quarterly) data by YCharts
In its most recently reported quarter, which ended Oct. 1, Beyond blamed its negative gross profit on underutilization and one-time termination fees related to manufacturing agreements. Its margins should improve but the question is to what degree, and whether they will be enough to make profitability a realistic expectation for investors, and for them to remain optimistic about the company's future.
3. Inflation has to come down
The one thing Beyond Meat can't control is inflation, and unfortunately, that can have the most devastating effect on its business. CEO Ethan Brown noted that "record inflation continues to pose a challenge for our brand and category." Alternative meat products such as Beyond Meat's are often priced a few dollars more per pound when compared to ground beef, thus making it difficult for the company to attract consumers and achieve growth.
At a high inflation rate, it will be harder for the business to turn a profit, and price-sensitive consumers will be less inclined to buy the company's products, effectively resulting in a one-two punch that could send the stock spiraling.
NASDAQ: BYND
Key Data Points
Is Beyond Meat's stock a buy?
Beyond Meat is a risky stock to buy today. It's rallying, but not based on an improvement in its financials, and that's a concern. The company releases its earnings results later this month and if there isn't progress to show that the business is on the right track, the consumer goods stock could quickly give back the gains it has amassed thus far. For that reason, I'd take a wait-and-see approach on the stock as Beyond Meat still has a lot to prove with respect to its financials.
