When an idea takes hold in the market, it can be incredibly hard to change, no matter what the evidence. That is why a contrarian trading style is so appealing. Most moves go way past their logical endpoint, and reversals are often sharp enough to offer the prospect of a quick profit. That happens both ways, up and down, and there is no better example of that right now than Beyond Meat (BYND).
With hindsight, the initial run up from the IPO price of $25 to around $240 was, shall we say, a tad overdone.
A strong run like that is kind of self-fulfilling. It might start out as a move based on a fundamental belief in the company, but after a while it becomes a stock that moves higher because people are buying it because it is moving higher, which prompts more people to buy it, etc. With a mature company, at some point, valuation pops that bubble and ends the feeding frenzy, but with something as young and dynamic as BYND, value is a tricky concept.
A stock’s value is derived from growth, so conventional valuation metrics such as the Price to Earnings (P/E) ratio mean little to nothing, but for the record, BYND has a forward P/E of around 235.
Beyond Meat though, is not concerned with profit at this point. They are rightly focused on expansion right now. Earnings are a function of revenue, but if achieving growth means spending money, that is what they are going to do. In that context, the fact that their last earnings report, released a couple of weeks ago, showed a profit is definitely a good sign for the future. It shows that they can make money if they choose to do so.
Still, what will decide where the stock goes from here is not their earnings or margin, it is the amount of revenue growth they can generate. To put a value on the stock therefore, you have to devise a way of comparing that growth to others, relative to the price. That can be done by looking at the price to sales ratio as compared to the broader market, then at the growth rate on the same basis.
BYND is currently trading at just over twenty times their sales, with a revenue growth rate, year on year in the last quarter, of 250%. That compares to S&P 500 averages of around 2.7 times sales and year on year growth in the last quarter of 8.36%. The stock’s price to sales is about 7.7 times the average, but their growth is close to thirty times the average.
That may look as if BYND is exceptional value, but the growth number is based on an exceptional quarter. 250% growth, most people would probably agree, most likely isn’t sustainable. If we look at the Wall Street projections for revenue next year rather than at last quarter, what we see is a projection for 65.2% growth on average. Using that number, BYND is at 7.8 times the S&P average growth rate, about the same as the multiple of sales.
So, at these levels, the conclusion would be that BYND is fairly valued.
There are two things to take from that. The first is that, while the market does tend to overshoot somewhat, it usually does correct itself to where a price makes sense. The second is that your opinion of BYND from here should be based on your view of that projected growth number. If they can beat those projections, the stock is cheap. If they fall short, not so much.
Based on history, the side that investors should take in that debate is obvious. Wall Street’s record of predicting growth for truly disruptive companies and new industries shows that they frequently underestimate potential. That was what drove Apple (AAPL) so much higher after the launch of the iPhone, for example, or Google (GOOG, GOOGL) in their early years, or Amazon (AMZN), or Tesla (TSLA) or any one of a host of other examples.
So, BYND, after some pretty alarming volatility, is fairly priced at current levels and, based on the perfectly reasonable assumption that history will repeat itself, represents a decent long-term investment.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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