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It has been up, up, and away for shares of Beyond Meat (NASDAQ: BYND ) ever since the plant-based meat producer went public in early May. The initial public offering price? $25. The Beyond Meat stock price today? Just over $140, and the stock was at $190 not too long ago.
When you have an asset that rallies so far, so fast, you're bound to attract controversy. BYND stock is no exception.
On one side, you have the bulls, who think that the Beyond Meat IPO has disrupted the global meats market. In turn, it will continue to steal industry share and drive a much bigger market capitalization than today's $8 billion tally.
On the other side, you have the bears, who think that the valuation on Beyond Meat stock is beyond crazy. Moreover, they view the plant-based meat category as over-hyped.
Which side is right?
I'm with the bulls. I noted when this company first went public that the Beyond Meat IPO was the beginning of something huge . I'm sticking with that claim. Plant-based meats may well represent the future of meat consumption, and BYND is poised to take substantial share.
Sure, it will take time for Beyond Meat stock to grow into its valuation. But, it also took Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ) and others a while to grow into their valuations. Those stocks performed very well in the "growing up" phase.
As such, I think buying and holding BYND stock for the long run is the right move. Of course, price matters. You don't want to buy this stock up at $190. But fundamentals imply that prices below $120 look good for healthy long-term gains; thus, it's a buy on current weakness.
The Market Opportunity for Beyond Meat Stock Is Huge
The first reason Beyond Meat stock is a long-term winner is because this company is leading the disruption of a massive market.
The global meats market measures around $1.4 trillion and is growing at a fairly steady 1% compounded annual growth rate. This market has produced many multi-billion-dollar-revenue companies, like JBS , Tyson (NYSE: TSN ) and Cargill . All three of those traditional meat giants reported revenues north of $20 billion last year. In particular, Tyson generated sales over $40 billion and JBS is up over $50 billion.
The Beyond Meat IPO, alongside other plant-based meat producers, is now disrupting this market. At scale, if this disruption plays out fully, these plant-based meat producers could hit from $20 billion to upwards of $50 billion in combined revenue.
Beyond Meat reported revenues of $40 million last quarter. Thus, the revenue growth runway here is very long and very robust.
The Trends Are Favorable
The second reason BYND stock is a long-term winner is because current trends imply that the plant-based meat disruption is an inevitability.
There are a lot of trends at play here. Some consumers are super-health conscious. As a result of scientific research indicating the risks associated with traditional meat, they seek healthier alternatives. Others are environmentally conscious, and here, other studies suggest that animal-meat production hurts the environment; thus, they too seek alternatives.
At the same time, there are consumers who are concerned with animal welfare, or preserving global resources. Of course, there are those who simply want to appear trendy. All these consumers are likewise shifting to alternative-meat options.
Broadly, there are multiple, wide-sweeping consumption trends at play here. Better yet, they're all in their early stages. This implies that plant-based meats will one day comprise a significant share of the global meats market.
Right now, plant-based meats currently comprise less than 1% share of the meats market. However, plant-based diary comprises around 13% share, and it's growing. It will easily hit 20%-plus within the next few years.
Therefore, at scale, the plant-based meats market should easily comprise 10% to 20% of the global meats market. That implies a total addressable market of $150 billion to $300 billion (assuming the total meats market continues to grow toward $1.5 trillion in the long run).
Beyond Meat Is a Big Player
The third reason Beyond Meat stock is a long-term winner is because the company projects as a critical player in this potential $150 billion to $300 billion plant-based meats market.
Across both the grocery store and food-service channels, the plant-based meats category is dominated by two names: Beyond Meat and Impossible Foods . In terms of U.S. consumer awareness, Beyond Meat has held a narrow lead over Impossible Foods for a long time. But, the home-run success of the Beyond Meat IPO has thrust it into the public spotlight, dramatically increasing consumer awareness. Just take a look at this chart representing search interest for Beyond Meat and Impossible Foods.
Consequently, it's safe to say that Beyond Meat stock is now the leader in the plant-based meats category. Will this remain true forever? Hard to say. This market is still early. A lot will change between now, and when it's a $150 billion-plus market. But, considering the company is scoring deals left and right in the food-service channel and expanding its product footprint, it appears BYND will remain relevant for the foreseeable future.
How relevant? Beyond Meat controlled just under 12% of the U.S. plant-based meat market in 2018. Considering the company's robust growth trajectory year-to-date, BYND is probably looking at 15%-plus share in 2019. Over time, that share will come down as competition ramps, and meat giants like Tyson and Cargill enter the space. Yet, 5% global share seems totally achievable at scale, implying long-term revenue potential between $7.5 billion and $15 billion.
The Margin Profile Is Healthy
The fourth reason Beyond Meat stock is a long-term winner is because, underneath all the big revenue growth and long-term potential, the company's margin profile is very healthy. This lends itself to huge profits at scale.
Beyond Meat reported first-quarter gross margins of 26.8%. That's a very robust mark. Over at Tyson, gross margins have historically hovered around the low-double-digit range. Thus, Beyond Meat has a far more attractive gross margin profile than traditional-meat producers.
Further, thanks to improved volume leverage, input cost reduction and supply chain enhancements, management expects strong revenue growth to drive gross margins toward the mid-30% range. At the same time, management thinks the opex rate will fall dramatically with scale. Further, EBITDA margins will approach the mid-teens over time. Depreciation and amortization are minor expenses here, so that likewise implies operating margins in the mid-teens range too.
Let's call it 15% operating margins and assume revenues at the mid-point of the $7.5 billion to $15 billion range. That combination implies around $1.7 billion in operating profits at scale. Taking out 20% for taxes, that equates to roughly $1.35 billion in net profits. Based on a market average 16 multiple, that implies a long-term valuation target for BYND stock of approximately $21.6 billion.
This long-term potential will take a long time to materialize, probably around 10 years. Discounting that target back by 10% per year and assuming a 60 million share count, that equates to a present value for BYND stock of about $140 per share.
Bottom Line on BYND Stock
Beyond Meat stock is in the top of the first inning of a long-term growth narrative. This will ultimately end with the company being a very important player in the soon-to-huge plant-based meats market. However, you don't want to buy this long-term winner at any price. But if shares dip back towards $100, that's probably an opportunity to add more for the long haul.
As of this writing, Luke Lango was long BYND, AMZN, and NFLX.
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