Down 66% year to date, Beyond Meat's (BYND 4.62%) stock still can't regain its former glory. Once predicted to take the food world by storm, the synthetic meat producer looks more like a fad whose 15 minutes of fame are over. Let's explore why a weak economic moat and out-of-control losses could mean more downside.
What went wrong with Beyond Meat?
Founded in 2009 and going public a decade later, Beyond Meat initially impressed investors with its unique business strategy. The company aimed to bring plant-based meats into the mainstream through technological innovations it claimed could replicate the taste and sensation of the real thing. Shares opened at $25 before soaring to an all-time high of $235 as investors bought into the company's vision.
But it didn't take long for the growth story to unravel. Beyond Meat's products turned out to be more of a fad than the megatrend its backers expected. At its core, the company lacks an economic moat, which is a unique competitive advantage to set it apart from rivals.
Beyond Meat's products are designed to appeal to omnivores and flexitarians -- people who enjoy meat but want to cut back for health or environmental reasons. This means it must compete directly with real meat, a material it struggles to replicate in taste and aroma (although this is subjective). Further, Beyond Meat's products are significantly more expensive than the real thing.
According to data cited by the Good Food Institute, its beef substitute is twice as expensive as real beef, while its pork and chicken substitutes are three times and quadruple their equivalents, respectively.
The business is deteriorating
Beyond Meat's challenging situation is impacting its operational performance. In the fourth quarter, net revenue fell 21% to $79.9 million as the retail and food service distribution channels deteriorated. The company generated an operating loss of $65.7 million and a gross loss of $2.9 million, which means it costs more to manufacture and distribute its products than it earns from selling them.
The poor margins will be a difficult problem to fix because Beyond Meat's products already trade for a substantial premium over real beef. So there is less room for price hikes to boost margins.
Image source: Getty Images.
To be fair, some of these headwinds can be blamed on temporary macroeconomic challenges like inflation, which increases production costs while hurting consumer purchasing power. And management is working to bring its costs back into line through cost-cutting measures, including layoffs, which eliminated 200 positions (19% of staff) in late 2022. But cost-cutting doesn't fix the company's core problem, which is its lack of an economic moat against real meat.
Beyond Meat is a strong sell
With $309.9 million in cash and equivalents on its balance sheet by the end of 2022 (compared to an operating loss of $342.7 million that year), Beyond Meat's cash burn looks completely unsustainable. And the company may be forced to raise capital by selling more stock, which can hurt current investors' claims on future potential earnings.
With a price-to-sales multiple of 2.3, the shares trade in line with the S&P 500 average of 2.4. But this doesn't look like a big enough discount for a company in such dire straits. Investors should stay far away.
