Sundry Photography
Investment Thesis
Despite the company’s current challenges including a substantial debt load, operational inefficiencies, and lackluster sales attributed to what I believe to be as poor product-market fit (PMF), I believe that Beyond Meat’s (NASDAQ:BYND) total addressable market (TAM) could see significant expansion, particularly under scenarios like a bird flu epidemic impacting US cattle supplies. I am not a consumer myself but such an event could drive some red meat consumers to explore plant-based alternatives, which could boost the company’s market share as it pushes for new, healthier product lines to capture a broader consumer base who have already transitioned or are just beginning to explore health-conscious options.
In my opinion, Beyond Meat’s strategic efforts to turn around its operational costs together with renewed market expansion opportunities are enough reasons for a strong buy in a high-risk, high-reward scenario.
Background
Although Beyond Meat is one of the pioneers in the plant-based meat industry, I think Beyond Meat’s substantial debt load, operational inefficiencies, and lackluster sales attributed to poor PMF have exacerbated its issues with a volatile consumer perception towards meat alternatives in a competitive sector.
When it went public in 2019, the COVID-19 pandemic initially provided a temporary boost in sales due to changes in consumer buying patterns. BYND stock benefited strongly from the warm public reception over vegan options at that time. However, the stock has since slumped approximately 83% and soon sent analysts reconsidering their recommendations. The hype around non-meat alternative products by curious consumers soon faded with the market (I believe) treating faux meat as a novelty rather than a permanent dietary switch.
This is where I think the problem lies with Beyond Meat (traditionally): there’s a dichotomy where individuals who avoid red meat often do not prefer the taste of red meat. Conversely, those who enjoy red meat see little reason to switch to a more expensive alternative that mimics what they can already consume.
More so, economic pressures including rising inflation and the cost of living have pushed consumers towards cheaper protein sources, away from premium-priced alternatives. A survey revealed that Beyond Meat products are priced at about triple the cost per pound compared to chicken and nearly double that of pork.
With this, the company is undertaking significant restructuring efforts and plans to raise prices and cut costs to balance sales and put the company in the black (profitability). This includes streamlining operations and reducing expenses by at least $70 million this year. Moreover, Beyond Meat’s management has committed to optimizing its production footprint and enhancing its gross margin.
The company is trying hard to turn itself around, and with this I believe the ongoing bird flu epidemic could create the impact on the poultry & beef industries needed for Beyond Meat by reducing supply and therefore increasing prices for chicken, eggs and beef products.
Bird Flu
Avian influenza, commonly known as bird flu, has been a major concern because of its impact on the poultry industry, wild bird populations, and global public health. It has caused significant economic damage in the global poultry sector due to the need for mass culling of infected or exposed birds to control the spread of the virus. Controlling bird flu to curb the transmission through migratory wild birds proves to be difficult, so recurring outbreaks in domestic poultry populations are possible as these have spread to more farm animals in the country this year.
In the U.S. poultry industry, recurrent outbreaks have resulted in infecting more than 90 million chickens since 2022, 9,000 wild birds, and 34 dairy (cow) herds, according to a report. Owners are forced to cull affected flocks, which means huge financial losses, disruptions in supply chains, and increased prices for poultry products. Recent detections of avian influenza in U.S. dairy cows have identified low mortality rates for cows, but the presence of the virus in cattle and the potential for milk contamination, although mitigated by pasteurization, raise concerns about food safety and the broader economic impact.
Cattle ranchers face a moral hazard in testing their animals for the virus. The fear of discovering an infected herd could lead to huge financial losses since the affected cattle might be culled or quarantined. This is not surprising, in my opinion, since the dilemma discourages proactive health checks and would most likely allow the virus to spread unchecked. Even the U.S. government is already concerned that not enough livestock are being tested for the virus.
For poultry farmers, the impact has been severe. Last month, the largest fresh egg producer in the country announced that it detected the virus in one of their Texas facilities. It’s surprising how fast the market reacts these days when news of an outbreak is made known.
In this regard, I think that the potential shift in U.S. consumer behavior accelerated by these outbreaks is possible. Several research studies have proven the change in purchase intentions related to the severity of the outbreak to be true, whether in China, Italy, or South Korea.
How Do Q1 Results Relate To This?
Q1 results were on their own somewhat underwhelming for Beyond meat. While the company reported revenue of $75.60 million that beat by $597,000, EPS of $-0.72/share missed by 3 cents.
On their cost cutting front:
Gross margin was 4.9% higher than each of the three previous quarters, but a reduction from 6.7% in Q1 2023. -Q1 Call
I believe this was driven largely by cost cuts given their $75 million revenue number was down 18.03% YoY:
Operating expenses in Q1 were $57.1 million, a $6.8 million reduction year-over-year. -Q1 Call
In essence, in some ways the call was good (the company beat earnings). In other ways, they missed earnings.
To be clear, I expect this thesis to play out largely based on the quickly spreading bird flu epidemic in the US. Like I touched on before, this should fix many of the issues that Beyond Meat has (this will cause natural beef and poultry prices to jump to more in line what Beyond Meat costs while also increasing revenue for the company).
Valuation
Beyond Meat is expected to earn $323.35 million in revenues this year but with a growth rate of -5.83% because of its operational and sales issues. Analysts are still reserved with revenue estimate growth in the following years, forecasting 6.59% and 9.68% rise in 2025 and 2026, respectively.
For me, the real story, again, is the potential for the company to capture more of the beef and poultry markets. Keep in mind that an epidemic for birds and cattle herds in the US is a knockout risk in a lot of ways (supply would likely drop significantly due to the exponential spreading effects of this pathogen).
Currently, the market sizes for red meat (beef + pork) and poultry in the United States this year are expected to reach $93.92 billion and $40.49 billion, respectively. If Beyond Meat can capture a combined total addressable market (TAM) of 1% of these two markets worth $1.3441 billion, the company could have a valuation of $1.694 billion (after applying an industry forward P/S multiple of 1.26 on this revenue that is captured). This represents a $1.161 billion valuation upside over the current market cap of about $532 million. In other words this is about 218% upside from today’s valuation.
Risks To Thesis
Like other players in trend-sensitive industries, where initial enthusiasm often struggles to translate into sustainable demand, the alternative meat sector has recently suffered the same fate in the United State. After peaking in 2021 at $7 billion, venture capital investment has sharply declined to only $1 billion in the first half of 2023. Despite this, Impossible Foods, the main competitor of Beyond Meat, has managed to outperform its rivals in terms of new product launches and expanded retail presence. The former recorded a 50% retail sales growth in the U.S. in 2022. Beyond Meat, on the other hand, has seen sales decline across almost all channels.
Beyond Meat’s major fast-food partnerships also failed to materialize into permanent menu items. Many of the company’s products featured in Dunkin, Tim Hortons, KFC, Pizza Hut and Taco Bell do not exist today, and two years after it launched its joint venture with PepsiCo for its meatless jerky, it has decided to call it quits and focus on new products instead.
Inflation has also affected consumer behavior, particularly in discretionary spending categories such as non-meat substitutes. Beyond Meat’s sales downturn is partly due to the rising cost of living squeezing consumers and leading them to choose more essential goods and cheaper alternatives over premium-priced plant-based meat alternatives.
And then there’s the so-called misinformation campaign that Beyond Meat has been trying to disprove for almost a year now. The Center for Consumer Freedom (CFF), which is run by lobbyist Rick Berman, has been running ads that attack plant-based food products, essentially tapping the fears that many unaware people have. Beyond Meat has responded with a series of ads in 2023 to allay concerns.
The company, in my opinion, is taking all of these in stride. As an example, during their previous (February 2024) earnings call, CEO Ethan Brown announced that they have started major restructuring to improve its financials:
…we sought to accelerate our transition to a leaner operating structure. As part of these efforts, we established a minimum of $70 million in cuts from our operating budget for 2024. We recorded approximately $95.6 million in non-cash charges, primarily relating to inventory and assets now deemed to be in excess are no longer consistent with our path to profitability and continue to consolidate our production footprint. -Q4 Call
I think Investors should also be on the lookout for the impact of its newest product, Beyond IV, as the company attempts to innovate with new ingredients that have less fat and sodium as a part of this purchasing trend change.
Conclusion
Beyond Meat has faced significant challenges, including a decline in sales, increased competition, and the impact of inflation squeezing consumer budgets. The alternative meat sector is currently in a downturn, with high prices and consumer skepticism impacting consumer demand. Despite these obstacles, I believe there’s a potential for upside due to market dynamics like the bird flu epidemic potentially boosting plant-based meat demand as traditional animal meats fall out of favor due to higher prices and consumer stigmas their meat may be tainted.
I believe that investing in Beyond Meat could represent an asymmetric bet with substantial upside potential, given the possibility of market shifts favoring alternative options. However, there are high risks associated with the current market conditions and the company’s struggles suggest that allocating a large part of your portfolio to the company may be financially irresponsible. For now, this could be a small asymmetric play in your portfolio. I think it’s a strong buy.
