Image: The Beyond Burger accounted for about 70% of the company’s sales in 2018.
The big question: how big is Beyond Meat’s opportunity? Is it $5 billion or $1.5 trillion?
By Valuentum Analysts
Shares of Beyond Meat Inc (BYND), one of the fastest-growing plant-based meat companies, have exploded higher since the meatless-meat producer went public in May. While this isn’t a stock we normally would like given the short operating history and lofty market expectations, we wanted to draw attention to the enormous potential Beyond Meat is targeting. As of the market close on June 10, Beyond Meat had a market capitalization of $10.1 billion. We estimate that if Beyond Meat is able to generate an adjusted EBITDA margin in the mid-teens over the long-term and win just a small slice of the global meat market, there may be more to the company than initially meets the eye, meaning the market’s euphoric opinion of shares may not be completely irrational.
For example, a report cited by Statista expects the global market for processed meats will rise to $1.5 trillion by 2022. Assuming Beyond Meat wins just 0.5% of that market and can generate an adjusted EBITDA margin of 15% (management expects the company will realize an adjusted EBITDA margin in the mid-teens as of its latest quarterly conference call), that implies $7.5 billion in sales and $1.1 billion in adjusted EBITDA by 2022. It’s possible that the global market for processed meats may even be larger by 2022, as according to Beyond Meat’s S-1 filing, the global industry currently stands at $1.4 trillion.
Capturing a small slice of a huge market isn’t always easy, however. In fact, many companies in other industries seek to do this and they come up short all the time. The global meat market is one that is not going away, in any case, even if other market research services are less optimistic. ResearchandMarkets expects the global meat market to grow to $1.5 trillion by 2026, hitting that target four years later than the forecast cited by Statista. Assuming Beyond Meat can generate an adjusted EBITDA multiple of 10x in the mid-2020s, that provides some justification to its current valuation, which we still see as very generous, however.
After all, we’re talking about EBITDA multiples on normalized EBITDA margins more than a half decade from now. There’s a lot that can go wrong. All we’ve witnessed from the company through 2018 is EBITDA losses, cumulatively to the tune of $58.8 million during the past three years. Adjusted EBITDA is only targeted at breakeven in 2019. Net losses have piled, up, too, and it was only last year when it finally generated a gross profit (revenue > cost of goods sold). We can’t forget that Beyond Meat was founded in 2009, too, not last year or the year before. It has been around for a while, even though it has only been public for a few months. Why has it taken so long to just get to this point in the adoption curve?
Regardless, many are forecasting a huge jump from the $40 million in sales Beyond Meat reported during the first quarter of 2019 (report released June 6), a number that was up 215% on a year-over-year basis. Management is targeting a revenue increase of 140% for the full year, which may even be conservative. There’s the possibility for Beyond Meat’s products to end up in the menus at McDonald’s (MCD), Shake Shack (SHAK), Wendy’s (WEN), Sonic (SONC), Burger King (QSR), KFC (YUM) and even Starbucks (SBUX) stores, which represents a few potential catalysts in the medium term. Products are currently being sold in grocery stores such as Kroger (KR) and Whole Foods and restaurants such as TGI Friday’s, A&W Canada and Carl’s Jr. However, in order to justify Beyond Meat’s lofty valuation as things stand today, investors are expecting the meatless-meat producer to continue growing revenue at triple-digits through the early-2020s. That will depend in large part on whether Beyond Meat can win over major customer accounts, keeping in mind there is a lot of competition in the protein market (for both meat and meatless products). Tyson (TSN) won’t be sitting idly by, and neither will Nestle (NSRGY) and other animal protein companies, including Cargill and Hormel (HRL).
The price of Beyond Meat’s offerings may be holding the adoption curve back at the moment. Beyond Meat’s meatless beef is retailing for ~$12 per pound, according to Barron’s, while ground beef usually retails at $4 per pound in America. The company’s meatless sausage offerings go for over $10 per pound, which Barron’s notes is 70% more than comparable offerings with meat. That’s usually far outside the range of the “ordinary” American household budget when it comes to regular protein purchases, but note that over time, it’s conceivable Beyond Meat will be able to materially reduce its average sales price (as its production costs per unit should in theory move significantly lower over time due to economics of scale, efficiency gains, and technological improvements in the meatless protein industry). Scale is the key part of this story. Consumers who may be interested in purchasing Beyond Meat’s meatless products at a lower price point could be won over if the company either lowered prices for existing products or launched middle-market protein options.
Beyond Meat would logically like to retain its ability to sell some of its offerings at the high price point, which could also be achieved through premium offerings (ultimately leading to a tiered product offering system based on quality and product category). Bigger picture, the scale built up catering to American consumers through domestic production facilities could be used to generate a competitive advantage on the international arena if Beyond Meat decides to aggressively pursue growth overseas. Scale is already having a very favorable impact on Beyond Meat, with the company’s gross margin up to 26.8% of net revenue during the first quarter of 2019, a major improvement over its first quarter 2018 gross margin of 16.1%. Management expects Beyond Meat can maintain a gross margin in the mid-30s, according to commentary during the firm’s latest quarterly conference call.
Though the company’s products and IPO have caught a lot of fanfare, we’re keeping a level head. Veggie (vegan) burgers have been around for a long time, with many crediting its creation in the early 1980s. Veggie burgers contain no meat of any kind either. Is this just another offering in the veggie category? Is the market extrapolating share of the entire processed meats market when it should be calculating share within the vegan and vegetarian market, which is expected to be about $5 billion by 2020? $5 billion or $1.5 trillion? That’s a big difference. Management wants its products to be sold in meat cases, but is it just another version of a veggie burger? Vegans and vegetarians are less than 5% of the population. Is this a product for vegans and vegetarians, not the other way around?
The key innovation behind the company’s products is that they are supposed to have the same “taste, texture other sensory attributes of popular animal-based meat products (S-1),” but will this be the case for all consumers? Will those that grill during the warm summer months and tailgate before sporting events trade their tradition for meatless patties that generate their protein from yellow peas? We think many will try the meatless burger, but as with anything, it will more than likely come down to taste, and we know how particular some can be when it comes to a great burger or sizzling steak. The company has already introduced Beyond Beef, “which is designed to replicate the versatility of beef,” but is it really going to replace the tradition at the dinner table? What about other plant-based protein competitors such as Boca Foods, Field Rost, Impossible Foods, and Lightlife? Surely, they will develop competitive products, too.
Concluding Thoughts
While shares of Beyond Meat are richly valued, this is a company seeking to capitalize on a very promising long-term growth opportunity in a market that has been around since the dawn of human civilization. It’s not often that something like the global protein market might get disrupted, but we’re not jumping to any conclusions. We think the firm’s next few quarterly reports will be fantastic as various channels test the market, and this could make for a strong multi-year streak of impressive performance (given marketing and sales promotions at grocery stores and restaurants), but when it comes to valuation and long-term investment considerations, will this be sustainable? It’s truly anyone’s guess, and while speculators are having a lot of fun with shares, we’re comfortable watching things from the sidelines. Give the Beyond Burger a taste test and let us know what you think!
Related: SAFM
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