While the back half of 2019 was a period to forget for Beyond Meat (BYND) investors, as the stock was beaten to a pulp, the first two weeks of 2020 have been a time for celebration. The stock is up more than 50% in the past five trading days alone, the bulls successfully defended $71.80 support, and they now have Martha Stewart in their corner with the Subway Beyond Meatball launch. The bulls may have won the battle here for momentum in January, but it’s too early to suggest they’ve won the war; this will require more work progress on the technical chart and a blowout Q4 report in February to suggest less deceleration than expected. The first sign of a definite change of character would be a weekly close above the $135.00 level, and it would significantly increase the probability that the lows are finally in at $71.30.
In late December, I wrote on Beyond Meat (BYND) and noted that while it was risky to buy the stock with momentum sharply to the downside, I would not be shorting Beyond Meat after the significant decline it had already seen. The three main ingredients for fueling a significant short-squeeze are high short interest, widespread negativity, and a stock that’s technically oversold. These are precisely the conditions that were in place for Beyond Meat as we entered January, and were a good reason to step aside or take profits if one was holding the stock short. The risk of being long and hoping for a short-squeeze is that it does materialize, but the risk of being short is much more pronounced. The shorts have likely learned a lesson here after this parabolic rally in five days, and those bears studying history, like the Tilray (TLRY) chart, could have avoided it.
For a brief history lesson, much worse stocks have seen larger squeezes in the past, with Tilray being a decent technical comparison to Beyond Meat in the past two years. The stock rallied over 1000% following its IPO debut and immediately saw a near-70% drop after putting in a parabolic blowoff top. The stock then pulled back three separate times by 50-60% over the next four months, with each drop being followed by a sharp 60-70% rally. We saw something similar from Beyond Meat following its IPO debut, with a near-500% rally, and the stock finally completing a 60% or larger drop as of December. This drop was combined with overly bearish sentiment and bearish articles even after a near-70% decline, and that suggested the risk was to the upside. This does not mean that the stock was a low-risk buy, but it does mean that it was an ultra-high risk short. The time to short is when everyone is giddy, not when everyone is negative on a stock, and it’s already down 60% in three months.
Beyond Meat: 2019-2020
However, while the bulls may have won the battle here in the first half of January, they still have a lot of work to win the war, with the primary task at hand being a blowout Q4 report. Let’s take a closer look at the company’s growth metrics below and why a strong Q4 is a must for the stock.
Beginning with annual earnings per share (EPS), there are two distinct differences with the Tilray and Beyond Meat examples being thrown around, and the key is profitability. While Beyond Meat is not profitable and is expected to post a net loss per share of $0.18 for FY 2019, earnings estimates for FY 2020 and FY 2021 continued to get revised higher. This is much more than can be said for Tilray, which has been public for nearly two years and has only seen net losses per share widen, with no profitability in sight. Therefore, before digging into Beyond Meat’s fundamentals closer, it’s important to squash the Tilray comparisons, as I believe they’re bogus and merely a product of the availability heuristic.
(Source: YCharts, Author’s Chart)
Taking a closer look at Beyond Meat’s earnings trend above, the company is expected to see an annual EPS of $0.34 in FY 2020 and $0.81 in FY 2021. The key will be meeting or beating these estimates for the stock, but I’ve typically found analysts to be more conservative with estimates when it comes to growth stocks and newly listed companies. Based on these earnings estimates, Beyond Meat would see a year of over triple-digit annual EPS growth in FY 2021 and would have one of the strongest earnings trends in the IPO group. It is far too early to tell if the company will meet these estimates for FY 2020 and FY 2021 just yet, but I’m optimistic at a minimum it will be profitable by FY 2020. This is more than can be said for many of the unprofitable IPOs debuting in the past two years, which continue to spin their wheels from a profitability standpoint.
If we move over to revenue growth rates, we have material deceleration in growth rates on the horizon, but still some of the highest growth rates in the IPO space. Beyond Meat’s revenue growth rate peaked in Q2 2019 at 287% year over year based on $67.3 million in revenue, and saw a 3700-basis point sequential slowdown in the revenue growth for Q3 2019 (250% vs. 287%). Based on revenue for Q4 2019, we are likely to see an even more pronounced sequential deceleration, with estimates sitting at $81.7 million, which would reflect only 160% growth year over year. This is not ideal in the slightest for Beyond Meat, but the company has trounced estimates in the past. The company’s Q3 2019 report beat estimates by $8.6 million on an $83 million estimate, and this translated to a more than 10% beat on the top line versus the forecast. Therefore, I would not rule out a decent beat for Q4 as well in the range of $90.0 million or higher.
(Source: YCharts, Author’s Chart)
In terms of revenue estimates for Q1 2020 and Q2 2020, they are also both reflecting material deceleration, with forecasted quarterly revenue of $77.1 million and $121.0 million, respectively. This would translate to 93% and 80% both respectively for Q1 2020 and Q2 2020, well below the company’s high-triple digit average revenue growth above 200% in FY 2019. Therefore, investors are going to want to see big beats on these figures as well. Ideally, we are going to want to see $90.0 million or better in Q1 2020 revenue and $140.0 million or better for Q2 2020 revenues. This will not be easy for Beyond Meat to achieve, given that these figures are $13.0 million and $19 million above estimates, but it would be required to prevent a significant slowdown in revenue growth rates. In my opinion, there’s no way the company can avoid material deceleration given the massive comparisons it’s lapping. Still, it would be ideal if Beyond Meat could deliver a massive beat and pare back what looks to be enormous deceleration of 5000 or more basis points sequentially from Q4 to Q1 (160% to 93%).
(Source: TripAdvisor, A&W Canada)
The good news from a revenue standpoint is that the company seems to be gaining traction, with the addition of Subway as a partner, and relatively positive comments from McDonald’s (MCD) recently – they expanded trials in Canada. While I haven’t tried the McDonald’s PLT, I have tried the Beyond Meat burger at A&W Restaurants and enjoy it as a meat alternative. Given that I have a less exciting diet, as I don’t eat much meat or dairy, the ability to have something that tastes very close to a burger when I eat out that’s also convenient makes it an attractive option. I’ve also tried almost all of the competition that analyst Amit Ghate highlighted in his most recent article, and they simply don’t stack up. The majority of the burgers from Dr. Praeger’s and Gardein are enjoyable but don’t taste anything like meat burgers. Therefore, from an anecdotal standpoint, I can certainly see the potential demand for those looking for meatless options when eating out. There’s no question Beyond Meat has a challenge ahead converting meat eaters, especially given pricing per pound, but it shouldn’t have a problem converting vegetarians and taking a good chunk of the market share.
My anecdotal opinion of the company’s products hardly reflects what all consumers are thinking, however, so it’s less relevant. Instead, what is relevant is that the company should be profitable by FY 2020, it saw its first quarter of profitability in FY 2019, and more chains seem to be allowing the company an opportunity to try out its products, with McDonald’s doing an expanded trial. The fact that Impossible Burger is out of the running for a McDonald’s partnership due to capacity issues is also positive, as it reduces competition as its biggest chain. In summary, from a fundamental standpoint alone, there’s a lot to like here as long as the company can put up a blowout quarter in Q4 2019 and Q1 2020 when it comes to revenues.
If we move over to the technical picture, I noted in my last article that the stock had tons of room overhead if it could finally get some momentum behind it. As we can see from the recent rally, this is undoubtedly the case, with the stock running up in a nearly straight line since breaking its downtrend near the $80.00 level. Given that Beyond Meat fell so sharply during its decline, there was no real congestion area until the $135.00 level, and this is certainly a possible target on this rally, as it’s the first area of key resistance. I would expect the stock to have a tough time getting through this level on a weekly close on its first try.
Based on this recent rally, we now have a new short-term support level at the $83.00 level, and this is a must-defend level for the bulls. In order to embolden the thesis of the bottom being in at $71.00, the bulls need to defend $83.00 on a weekly closing basis. As long as they can achieve this, I believe the bottom is likely in for the stock at $71.00. However, for traders that bought the lows, taking some profit if we head to $133.00 or higher would be a wise move given the resistance level just above there.
The only big negative here for the bulls is the fact that the price-to-sales ratio is now back within a stone’s throw of 30x, and the stock is now reasonably priced going into its Q4 report, assuming it heads into this report above $130.00. While this revenue multiple will improve after the report, the bulls are going to need a solid beat to keep this rally alive at the current valuation. Therefore, I see no reason to chase the stock at current levels, but do believe that a low-risk opportunity could show up on a 20%-plus pullback as long as the bulls defend the $83.00 level.
Beyond Meat continues to be an exciting company and a market leader in its space, and the company’s revenue growth rates are exceptional regardless of the deceleration. After a more than 60% decline from the highs, I believe the slowdown was priced in for the most part, and I am confident that the lows are in at $71.80. The key, however, to sustaining this rally will be a blowout Q4 report and the bulls playing defense at the $83.00 level going forward on a weekly closing basis. As long as the company can report $90.0 million or better in Q4 and Q1 2020 revenues, the lows are likely in at $71.00, and there’s a high probability of a higher low in the $80.00-95.00 range on any weakness.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.