The slide in Beyond Meat's (Nasdaq: BYND) share price last Tuesday, since slightly offset by a correction, attracted attention from very different kinds of people. One kind is capital market players who have been following the company and the lively meat substitute sector with great interest. Another is advocates of veganism and sustainability, who have seen their world views turn into an economic bonanza, and who want to make sure that it continues that way
The current drop in the share is primarily a capital market story: a profitable IPO in a hype-ridden sector, the release of blocked shares held by investors, and their wish to get rid of the share without jeopardizing their profit from it, in view of the market's volatile mood in the sector and in general. The story here, however, is more complicated, and raises questions about the future of the meat substitutes sector. Beyond Meat posted decent revenue in the quarter and appears to be well-managed, but can it really continue to fulfill the hype and interest in what is after all just a processed pea burger?
Meat substitutes, of course, have existed for many years. Israel has established itself as a power in the sector with Tivall, whose products are now marketed by Nestle under the Garden Gourmet brand. It must be admitted, however, that these products do not really taste like meat. The products of Beyond Meat and competitors like Impossible Foods are designed to provide a real meat experience.
Consumers are divided in their opinions about the success of these products. Some say that they are a successful imitation of meat, while others contend that the taste is similar, but the texture still requires improvement. In any case, there is general agreement that Beyond Meat's solution is the best so far for people who wants to chew their vegetable protein in the form of an industrial hamburger. Questions have been raised about the company's claims that its product is healthier. It contains only plant products, with no genetic engineering, but it is also processed down to the molecular level. As far as sustainability is concerned, the company claims that its product generates 90% less greenhouse gases, uses 99% less water, and consumes less than half as much energy as a beef hamburger. No allegations have been made so far that the product is not environmentally friendly.
The hype has been dwindling since July
Beyond Meat's IPO last May opened the world's eyes to the meat substitutes sector. The company held its offering at $25 a share, and the price skyrocketed by over 163% on its first day of trading. Two months later, it rose to an unimaginable $234, representing a $12 billion market cap - an increase of 836%. Beyond Meat was the only listed meat substitute company when the world discovered the category and realized that it was likely to conquer a substantial share of the meat market.
The beef sector alone has a $222 billion annual turnover. Up until now, vegetarian meat substitutes were only a small part of this market, with vegetarians and vegans eating a lot of salad, legumes, and tofu (a market that already has a global turnover of more than $2 billion). Now, however, there are analysts gambling that the meat substitutes market will grab a 10% share of the meat market within a decade, even before the arrival of substitutes for poultry and other types of meat.
The story behind Beyond Meat was also part of what drove this process. CEO Ethan Brown described the moral dilemma over eating meat that affected him from a young age. People like Bill Gates invested in the company, and it rode a growing wave of concern about sustainability. The strong commercial launch of the company's meat substitute product came at the same time as its IPO, so investors could simultaneously enjoy a profit, a clear conscience, and a new experience.
Starting in July, the hype began to dissipate as fast as it had appeared, but the share price is still 320% higher than in the IPO. The main question about Beyond Meat is the extent to which the company will be able to maintain its differentiation in a category that competitors are constantly entering. Beyond Meat has many patents, but there are various ways of getting a meat taste. The question also arises of how much interest in the product can be maintained when the hype is waning. There is concern that vegetarians and vegans will eventually return to non-processed products, while meat lovers will find it hard to give up the real thing. In the longer term, there is the cloned meat sector, which promises to give the world conscience-free meat with the real taste and texture of meat, not just a reasonable approximation.
What happened last week
Last week's drop in Beyond Meat's share price is primarily a result of the release on the market of blocked shares from the IPO. As part of the pre-IPO that took place on May 2, all investors, including company employees who received shares, were barred from selling or hedging them for 180 days. When this period expired on Monday last week, the participants in the most turbulent IPO in the past two decades hurried to cash in before the roller coaster went on its way.
This event overshadowed the quarterly report published last week, in which the company surprised the market, raised its guidance, and reported a profit for the first time. Beyond Meat posted $92 million in revenue in the third quarter of 2019, three times as much as in the third quarter last year, and posted a $4.1 million profit, compared with a $9.3 million loss in the corresponding quarter of 2018.
Once the waiting period that had prevented company employees and investors in the IPO from selling the shares was over, they could sell their shares on the open market, and the number of shares they poured onto the market was estimated at 40 million.
JP Morgan wrote that the days following the expiration of the vesting period would indicate what was to follow, and the share price indeed surged 8% on the following day, giving investors grounds for optimism. Beyond Meat, however, which held its IPO at $25 a share, now has an $88.90 share price, far from its $239 peak. The company's good reports also showed a $3.6 million operating profit, compared with an $8 million operating loss in the corresponding quarter last year, but that was not enough for some of the investors, who exploited their opportunity to take their profit and run, causing a 20% one-day drop in the share price.
The competition in the meat substitutes market and concern about another dilution of shares also contributed to the downward pressure on the share, but it appears that Brown is not worried. "We welcome good competitors, because it motivates our team," he said. According to Brown, innovation is what distinguishes Beyond Meat from its competitors. Beyond Meat arrived ten years ago, before everyone else and two years ahead of Impossible Food. "We're very aggressive in the US, Europe, and Asia. This is an isolated low point," Brown explained, adding, "We'll continue to lead the market. Our effort is to build a large protein company that will exist for decades, so we're not looking just a few months ahead."
Consistently rising revenue
Beyond Meat has managed to brand itself as a pioneer in the sector, but faces competition from not only the small manufacturers, but also huge conventional companies, such as Tyson Foods and Nestle. In addition, Impossible Foods has managed to insert its vegetarian hamburger into the Burger King chain. On the other hand, Beyond Meat's products are on the shelves of large food retailers, such as Target, and Kentucky Fried Chicken examined several chicken substitutes in Atlanta. Beyond Meat also reported last week another pilot with US diner-style restaurant chain Denny's, and Dunkin' Donuts has also begun offering Beyond Meat's hot dogs for breakfast in Manhattan, with an option for expanding the activity. "If we look at the adult consumer, he comes to our brand mainly because of health, and if we look at the young consumer, he comes to us because of concern about climate change, animal welfare, and also lifestyle. The idea is that we create meat directly from plants. You don't need animals for that," Brown says.
Nevertheless, the partnership with McDonald's announced by the company last month aroused concern among market analysts. While it represents another foothold among the major league players, some believe that this partnership is too big for Beyond Meat, and that McDonald's customers have not been eager consumers of the products so far.
What comes next? With a market capital almost five times the IPO valuation, Beyond Meat is still be valued on the basis of the future promise of a switch to plant-based protein. Nonetheless, it appears that the growing need for cattle pastures and the enormous environmental damage resulting from meat consumption is likely to provide a further incentive that will support the meat substitutes channel, with awareness constantly growing.
Published by Globes, Israel business news - en.globes.co.il - on November 4, 2019
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