Why investors are disappointed with “nonmeat” manufacturer Beyond Meat, which costs $6.3 billion and showed profit for the first time
On October 28th, Beyond Meat, an artificial meat producer, has published the results of the third fiscal quarter of 2019. The company showed a net profit for the first time since its conception, which totaled $4.1 million or $0.06 per share which exceeded Refinitiv analysts’ expectations of $ 0.03 per share. However, to put the figure in perspective, the company reported a loss of $9.3 million a year earlier.
The company had also raised its forecast for the entire fiscal year, saying it expects annual revenue of $ 265 to $275 million compared with the original forecast of $240 million.
Despite financial results showing a higher figure than analysts' projections, Beyond Meat shares dropped 6% after the trading closed on October 28th and were worth $99.10 at 23:50 Moscow time, with the lowest value for the day falling to $97.85.
The Wall Street Journal analysts believe that the company is still overpriced and that the stock prices will continue to fall due to high competition, a lack of new products, and most importantly, the expiration of a lock-up period which prevented Beyond Meat from selling 80% of their stock, which will end on October 29th.
CNBC Trade Nation analyst Jay O'Hara agrees, stating his opinion that in the near future, Beyond Meat shares will only continue their selling trend, and their price will decrease by around 16% to $85. In the long run, stock prices will only go up if Beyond Meat and its competitors increase sales and short-seller activity decreases.
What happened to Beyond Meat shares after the IPO
In May 2019, Beyond Meat held an IPO with a base stock price of $25 per share. In just over two months, the value rose to $200 per share, and the company's capitalization exceeded that of Shake Shack and Wendy’s restaurant chains.
Beyond Meat has become a unique company for the financial market being the first producer of artificial meat that went public. Because of this, the market didn’t understand how to properly evaluate Beyond Meat, which explained the large spikes, according to Michael Antonelli, Managing Director of Robert W. Baird & Co.
Meanwhile, analysts at JPMorgan and Barclays say that the reasons for the rapid growth can be attributed to the demand for vegetable-based meat analogues and the sector’s successful first fiscal quarter, in which revenue grew by 215% compared with the same period in 2018 showing a rise from $12.8 million to $40.2 million.
The value of Beyond Meat shares began its sharp decline on July 29, after the publication of a financial report for the second quarter of 2019, in which the company announced plans to re-issue 3.25 million shares at a discounted $160, while their value on the exchange at the time was $196.5.
3 million of the aforementioned shares offered belonged to early investors from Kleiner Perkins and Obvious Ventures, who wanted to capitalize on the 800 percent value increase of their securities. Beyond Meat CEO Ethan Brown himself, sold over 39,000 shares.
The company’s self-inflicted devaluation scared away investors who thought that traders were simply getting rid of the stocks as soon as possible, not seeing a potential for growth. Their fears were confirmed by nine analysts who rated Beyond Meat stocks at neutral or below.
By October 28th, Beyond Meat stocks fell to $100 per share and the price continue to decline.
Over the past few years, investment in plant-based food producers has skyrocketed, and over the next decade, sales of meat substitutes will amount to 10% of the entire meat industry which is valued at $1.4 trillion, writes the Financial Times. In 2018, investments in such startups totaled over $315 million, and market competition continues to grow.
“Despite the fact that Beyond Meat was one of the first artificial meat companies in the market, the threshold for entering the business is very low,” according to Exane BNP Paribas analysts, who valued Beyond Meat stock at $70 per share. They also believe that large food manufacturers like Nestle, Tyson, Kellogg and Hormel plan to enter the market with their own meat substitutes, creating new white-label sub-brands, as they have enough resources for research and development.
To underline this belief, on October 22nd, Kellogg announced that their daughter company Morningstar Farms will partner with Pizza Hut and begin testing their new meat substitute Incogmeato. The product will be added to the Garden Specialty pizza and consists of artificial Italian sausages, onions, mushrooms and peppers, and will be sold in a specially-designed round box.
Impossible Foods, a major competitor to Beyond Meat, also announces their successes: the company looking for ways to enter the European market and has sent an application for certification. Meanwhile, in August they had received permission to sell artificial meat in the United States.
Removing the sales block
The rules for entering the American stock exchange outline a period of three to six months, during which the regulator prohibits the sale of shares to founders, employees and early investors. This seriously affects the valuation of technology companies, especially if they do not have a sustainable business model, writes the Financial Times.
If shareholders decide to make money on the three-fold difference between the initial and current value of the shares, removing the lock will cause a sharp sale of securities, CFRA analyst Arun Sundaram believes. In October, CFRA put Beyond Meat on a Sell rating.
“Given the sharp increase in the value of securities after the IPO, we expect many investors and private equity funds to cash out Beyond Meat shares, thereby exerting even greater pressure on reducing their value,” Sundaram said.
One major group that is definitely looking forward to the removal of the block is the short-sellers, who sell securities in short positions and bet on a price drop. On October 29, Beyond Meat will allow the free sale of 49 million of its shares. This is 77% of the share in circulation.
Short sellers now account for 47.2% of the freely traded shares of Beyond Meat which has a total value of $672 million - this is the second largest short-sell figure in the Russel index, which evaluate 1,000 largest companies on the American stock exchange.
The rules for entering the exchange and the randomness of investors result in companies seeking alternative options for entering the exchange, such as direct listing, when the company lists shares without attracting new investors.
Slack and Spotify are a good examples of direct listing in action, and it is possible that this option will gain popularity in the near future. In September of 2019, a closed conference of investors, venture capital funds and bank representatives gathered in Silicon Valley to discuss strategies for making direct exchange listing more popular, writes the Financial Times.