Beyond Meat: A Stock With A Mispriced Probability Of Profit

seekingalpha04-11

Beyond Meat's stock has fallen over 80% since going public in 2019 and is at risk of significant decline.The company's business model struggles to compete with cheaper and better-tasting alternatives ...

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Since 2019 its stock has fallen over 80%, and with no sign of profitability or ability to turn around, it's of my opinion that Beyond Meat is destined for the chopping block. BYND is a relatively small company by market cap, trading for just under 480m, yet has total equity of negative 513m, putting its book value at -107% of its share price. The main attraction of BYND is that its complete inability to turn a profit has driven its stock price to the point at which buying it for its revenue potential alone has become a reasonable risk/reward tradeoff for investors willing to risk everything, as a company trading at a TTM P/S ratio of just 1.41x is more than capable of flipping a multi-hundred percent return in the event that the company magically becomes profitable. Beyond Meat hasn't got much more to fall before it becomes clearly priced for failure, which I would estimate to be near certain within the next ten years based on their available capital and the interest on their debt. The key to making a trade on BYND is creating a price target backed with numbers, as its price is purely a function of the probability that it either goes bankrupt, or turns profitable. To determine this value, I will use varying probabilities of failure and profit, as well as differing margins of profitability to calculate potential earnings. Business Model and Macro Economic Trends Beyond Meat sells a plant-based alternative for meats to vegetarian and/or vegan consumers. Plant-based meat can be fairly easily classified as normal good from your first year economics course. We can see the fairly noticeable decrease in revenue over the recessionary year 2022, as consumer spending moved to substitutes, which are more than adequate to replace BYND's product. Throughout the course of Beyond Meat's product history, you can pretty easily see a problem, simply by going to the grocery store. There is no way for Beyond Meat to corner the market in plant-based meat. Anecdotal but representative of the main problem with Beyond Meat is the fact that I have yet to see someone eat a Beyond Meat product. I have plenty of vegetarian friends, and many vegan friends, and they all opt for a cheaper and better tasting alternative. Beyond Meat's products are some of the more expensive meat alternatives at a grocery store, and are very replaceable by cheaper alternatives. Beyond Meat simply lacks the ability to capitalize on its product through a loyal consumer base. Beyond Meat's TTM Revenue In Billions, Down Almost 30% (Q4 2021- Q4 2023) (MacroTrends) Dangers of Debt One of the most visible and talked about concerns with BYND is its debt. For a stock with a market cap of 480m, its debt load is extremely dangerous for a company struggling to make a profit. With negative cash flow, negative net income, and yearly revenue not even capable of covering a quarter of their liabilities, and in my opinion, BYND is too close to failure for most investors to touch. They have over 1,290m in liabilities, 75m of which are current liabilities, and another 1,210m in non-current liabilities. Beyond Meat holds 372m in current assets, of which 130m are total inventory, which I'll write off for purposes of debt coverage, and another 402m in non-current assets, of which the vast majority (324m) is held in plant/property and equipment, not accessible for purposes related to quickly paying off debt. In my opinion, 200m is a fairly conservative measure of BYND's accessible capital for debt payments, making up 270% of BYND's current liabilities, however just 16% of BYND's non-current liabilities. Throughout the last year, via a drawback in assets and ~30m increase in liabilities, their equity has fallen more than 103%, from -253m in Q1-2023, to well under 513m in Q4-2023. This marks what I believe to be the beginning of a drastic decrease in assets and increase in liabilities as BYND moves to secure revenue growth at all costs, at the long-term expense of shareholders buying for profitability. Beyond Meat's total equity over the last year and a half (MacroTrends) Measuring BYND's Upside- Probability Of Profitability As with the majority of investment vehicles, valuing a stock is not simply finding a single number a stock is worth, but calculating the probabilities surrounding an investment. The probability an option expires a certain amount in the money, the probability a bond issuer defaults, and with stocks, the probability that a company is able to survive, generate money, or pay out a dividend. To reiterate a prior point, Beyond Meat's sole attraction to investors is its impressive P/S ratio, proving a strong opportunity in the event of a magical turnaround of profitability, however for the P/S ratio to mean anything, a company must be either able to make a profit, or have enough of a chance of becoming profitable with a margin significant enough for the P/S to make out a shadow of future P/E. BYND trades at a P/S of 1.4x, and if we just throw out some numbers for the sake of modeling and give the company a 10% profit margin, and a generous P/E of 30x, well, the company would have a net income of 34.3m using 2023's revenue numbers, putting its market cap at 30x that, 1,029m, roughly 3x our current market cap. Incorrect Pricing The following math places our \"priced in probability of profit\" at about 33%, assuming that said profitability would be a 10% margin. Use these numbers as a basis to judge what you believe Beyond Meat's potential value is, and to place a trade based on its relativity to the current share price. I, personally, believe that Beyond Meat has less than a 10% chance of being profitable, and again without 10% profit margin, that places the company's \"Priced in probability of profit value\" at 103m, (Taking a 30x P/E to a 10% net income margin of their 343m, then dividing by 10, the probability this sudden change to profitability occurs). This places the stock price at about $1.6 a share, my personal price target for BYND. Negative Momentum Beyond's share price has seen a 50% decline over the last year, with no sign of a trend reversal. BYND's price only ever pops due to higher than expected revenue, further proving the Probability of Profitability valuation, something that has no leg to stand on when the company's earnings per share is fairly stable in the strong negative range. BYND's earnings, net income, and even gross profit are all negative, and more than low enough to really discourage investor belief in a turnaround. As someone with a negative outlook on the stock, this momentum offers a solid entry into a short position, and an anchor dragging down the potential growth on a long position. Below is BYND's earnings per share, declining dramatically after barely becoming profitable in early 2020, to a P/E of almost -1x. With continued losses of this magnitude, Beyond Meat offers an opportunity for short sellers to take advantage of earnings, acting as catalysts for further deterioration in share price. Out of Beyond Meat's last 6 earnings, only 2 have had positive share movement after, and even then, the share price quickly returns to its prior price well within a month or two after earnings. Beyond Meat's TTM EPS, Q2 2018-Q4 2023 (MacroTrends) Risks  Risks are inherent when talking about going short a stock regardless of the situation. Leaving investors open to unlimited loss, retail investors, and even professional asset managers tend to avoid incorporating short positions in their portfolios, including me. As much of an advocate as I am for short selling correcting overvalued share prices, I personally still refuse to take on the risk offered by shorting stock or calls, and maybe you should too. Beyond Meat's cost to borrow stands at an impressive 70% annually, something that alone indicates both the difficulties faced by a short position, and the likelihood of this thesis being correct. Along with the inherent risks, there is an unlikely yet still non-zero chance that Beyond Meat becomes the dominant player in green meat, and is capable of turning a profit, which would be sure to send its share price well over the pivot point of max loss in a short position. Between the risk, and the upstream battle faced by beating out the borrow fee to the bottom, I think that it is of the upmost importance that an investor be aware of the difficulty faced by short sellers, especially on Beyond Meat. Yet keep in mind the potential profit you could face if Beyond Meat continues to revert to its true value, well below 25% of its current share price, as discussed earlier.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2426289375"}