There's a long list of companies that thrived during the first two years of the pandemic only to fall upon extremely hard times as the public health crisis began to wane. Buy now, pay later pioneer Affirm (AFRM -0.45%) and plant-based meat producer Beyond Meat (BYND 0.16%) are two prime examples.
Both stocks have tumbled more than 90% from their respective peaks, but neither looks like a good investment despite a beaten-down share price. Here's why investors should consider giving up on these two former highfliers.
Affirm
Buy now, pay later (BNPL) made a lot of sense when interest rates were low. By paying a small fee, merchants could offer customers 0% financing from companies like Affirm. Particularly for merchants selling big-ticket items, Affirm could help close sales that may have otherwise not happened at all.
The whole BNPL industry makes a lot less sense now that interest rates have ballooned. Offering 0% financing becomes more costly, and the allure of financing with Affirm for the customer isn't nearly as strong when there's a sky-high interest rate attached.
Affirm is still growing transaction volumes in this environment, but losses are exploding. Gross merchandise volume was up 18% year over year in the fiscal third quarter, which ended March 31, and up 24% excluding Peloton. Revenue rose 7%, or 15% excluding Peloton, to $381 million, with the shift away from 0% interest monthly installment plans hurting growth.
Revenue minus transaction costs tumbled 8.5% in the first quarter as transaction costs rose, and Affirm's bottom line took a big hit. The company posted a GAAP operating loss of $310 million, worse than a loss of $226.6 million in the prior-year period. Free cash flow was a loss of about $85 million.
Affirm is aiming to be profitable on an adjusted operating basis as it exits the current fiscal year, but that's not a very meaningful goal. Adjusted operating income backs out depreciation and amortization, stock-based compensation, and a variety of other costs that should not be ignored by investors. The truth is that the company is nowhere near turning a real profit.
It's not that BNPL can't work in an elevated interest rate environment. But the scale at which it can work is an open question. The APR on Affirm loans can reach 36%, higher than credit cards, which raises some questions about the quality of the company's loan portfolio. Delinquency rates have been improving recently and look good overall, but how do these loans perform during a recession? The industry is too new to know for sure.
Is the BNPL industry an anomaly of ultra-low interest rates that will fizzle out, or is it here to stay? Either way, Affirm just doesn't look like a compelling investment.
Beyond Meat
The plant-based meat craze looks to be over. Beyond Meat is struggling with lower volumes and lower pricing. The company's revenue tumbled 15.7% year over year in the first quarter, driven by a 7.3% decrease in volume and a 9% decline in revenue per pound.
The U.S. retail segment did particularly poorly, with revenue crashing 35% year over year. Overall gross margin was just 6.7%, and that includes the positive impact of reduced manufacturing costs, decreased logistics costs, and a beneficial change to the depreciation of manufacturing equipment. The company posted a net loss of $55.8 million on $92.2 million in sales.
Excluding Beyond Meat's jerky product, the company sold its products in 33,000 retail distribution points in the U.S. during the first quarter. Here's a dire statistic: On average, each retail outlet sold less than 3 pounds of Beyond Meat's products each day. It's hard to imagine retail outlets sticking with the product given that level of sales volume.
Beyond Meat is planning to raise up to $200 million with an "at the market" offering of common stock, which will help shore up the balance sheet while seriously diluting existing shareholders. Beyond Meat had $274 million in cash and cash equivalents at the end of the first quarter, roughly half of what it had one year prior. An extra $200 million will buy the company time, but with a market capitalization of just $800 million, the share count will expand substantially.
A comeback for Beyond Meat is going to require a 180-degree shift in consumer behavior. It's also going to require the company's products to somehow stand out in a sea of similar alternatives. Given Beyond Meat's struggles with pricing, it clearly has no pricing power at all. The Beyond Meat brand doesn't seem to matter in the grocery store.
These challenges may end up being impossible to overcome. There's always an outside chance of a dramatic turnaround, but the odds don't look good for this plant-based meat pioneer.
