Why Beyond Meat’s valuation is hard to swallow
It has been a tough start for some of 2019’s top market debutants. Uber, once reckoned to be worth $120bn, now languishes with a market capitalisation of less than $70bn while ride-sharing competitor Lyft is down about 8 per cent since its April listing.
However, one IPO has sailed through these troubled waters: Beyond Meat, the $4.8bn-market cap maker of plant-based meat substitutes, which raised $241m when it listed on the Nasdaq almost a month ago. Its shares are up an eye-popping 219 per cent since it priced at $25 on May 2. So why the euphoria?
Pull up the financials, and the most striking thing is how small the business still is. In 2018, Beyond Meat recorded less than $88m of revenues and made an operating loss of $30m. That is a trailing price-to-sales ratio of 54 times — or 15 times the average S&P 500 company.
Investors are not paying for the present, however, but a future in which the $1.4tn global meat market has been replaced by engineered products that satisfy even the most ardent of carnivores. Products that, crucially, do not inflict anywhere near the same level of damage to animals or the environment.
The latter point is fundamental to Beyond Meat’s valuation, and it is not hard to see why. According to a report by the UN’s Food and Agriculture Organization, livestock account for almost 15 per cent of all human-induced greenhouse gas emissions, with cattle the biggest contributor.
Animal production also accounts for 29 per cent of water use in global agriculture, according to a 2013 study, and uses up to 80 per cent of agricultural land. That is more than one quarter of the earth’s ice-free surface, according to the FAO. Cattle, again, are the biggest culprit, using 60 per cent of agricultural land while contributing just 2 per cent of calories consumed, per a 2012 report on deforestation. An efficient use of space and resources, it is not.
This matters because whether you believe in climate change or not, the political forces pushing for environmentally driven economic reform are in the gaining traction. For instance, 11 of the Democratic candidates for the 2020 US presidential race have thrown their weight behind the “Green New Deal” — a radical set of reforms designed, in part, to ensure the world staves off environmental disaster. Similar measures have been proposed by the UK’s Labour party.
That is just the supply side of the equation. On the demand side, vegetarianism and veganism are on the rise. Waitrose, the UK supermarket chain, found that 13 per cent of Britons are now vegetarians, with 21 per cent identifying as “flexitarian” — looking to reduce the amount of meat they eat.
In short, there is a growing set of beliefs that meat is inefficient, bad for the environment and questionable for your health, and these are driving consumer habits.
Beyond Meat answers this call. So the question for investors is not so much whether the tailwinds are in the company’s sails but more what share of the huge market it can capture. Let us reverse engineer its $4.8bn equity valuation, via a competitor, to see what investors think is possible.
Finding a comparable company is difficult, given Beyond Meat is the only pure-play plant-based protein company listed, but there is $29bn Tyson Foods, which produces one in five pounds of all chicken, beef and pork consumed in the US.
Tyson trades at a price-to-sales multiple of 0.7 times, and, due to its low 8 per cent operating margins and revenue growth that roughly tracks the size of the economy, a price-to-earnings ratio of 7 times. Revenues and net income were $40bn and $3bn respectively last year.
Set the clock to 2023, and the sole analyst with estimates for Beyond Meat reckons it will generate $940m in revenues that year, with margins a touch above those of Tyson, at about 9 per cent, producing $81m of profits. A forward-revenue multiple of 4.5 times does not seem crazy, if 25 per cent growth in sales holds steady. But at that rate, it will take another five years, through to 2028, to generate the revenues to justify its current $4.8bn valuation. And competition is coming.
Tyson is developing its own line of alt-protein products, while $294bn Nestlé has already launched a range of meat-simulating products. Then there is Impossible Foods, whose recent success with Burger King has seen its “Impossible Whopper” earmarked for a US rollout by the end of the year.
That is a lot of firepower to fight against for a business yet to prove it can scale. And with the share prices of Silicon Valley’s high-growth businesses beginning to fall, it is hard to see where the upside is for Beyond Meat’s investors at the moment.