Beyond Meat's Survival Is Unlikely, But May Be Too Dangerous To Short

The beginning of 2023 saw the startling rebound of many stocks that struggled throughout 2022. One notable example is Beyond Meat (NASDAQ:BYND), which has risen 44% this year ahead of its Q4 report this Thursday. Despite its sharp reversal, BYND remains around 75% below its IPO value and over 90% below its peak price. The company has disappointed investors due to its lack of revenue growth and seemingly out-of-control expenses. Beyond Meat's cash balance has worn down, and without new financing, it may go bankrupt this year if it continues to burn cash at its current pace.

Of course, when battered-down stocks rebound sharply, investors may flock to it as a discount opportunity. Although BYND's short interest has declined, it is still high enough to warrant an enormous short squeeze. In the long run, investors must determine whether or not Beyond Meat has robust plans that will enable it to become a consistently profitable and competitive enterprise. 2023 is the "make or break" year for the company; if it fails to become profitable, it may cease to operate. If it can accomplish this, BYND may rise much higher as its valuation is still far-below its IPO price.

That said, Beyond's business model is very cost-intensive and, in my view, disproportionately exposed to supply-chain and inflation issues due to its processing-intensive nature. The company also faces growing competition and could lose sources of recurring revenue. I believe BYND's recent rally is likely to be a "dead cat bounce" that will proceed to more significant drawdowns than a sign of long-term reversal.

Can Beyond Meat Ever Be Profitable?

Beyond Meat's success has very little to do with the overall success of plant-based protein alternatives. For one, commercialized vegetarian "grillable" meat alternatives have existed for many decades and, to an extent, since ancient times. Beyond Meat is certainly not a "first mover" in a high-growth industry; it is a younger competitor in a relatively old and stabilized industry with immense competition. The critical difference is that Beyond, as its peer, Impossible Foods (IMPF), is strictly vegan (no egg binders) and does not use wheat gluten or soy - cheaper plant-protein sources. Beyond uses more complex ingredients and aims to make a product that is more "meat-like." Of course, Beyond's products are far more cost-intensive and ingredient-intensive than the old-school "black bean burger."

In my view, Beyond's business model has a few critical issues. One, it does not have a core customer base since it targets "flexitarians." In the company's earlier days, it estimated that 70% of its fans were current meat eaters. The reasoning is that most vegetarians and vegans rarely make burgers or other foods that require close meat alternatives. Beyond Meat could obtain two advantages over animal meat: lower cost (particularly with rising meat prices) and perceived health benefits of plant-based meat. However, Beyond Meat's products are generally more expensive than animal meat and are not necessarily healthier. Beyond meat could market itself in fast-food and restaurants for vegetarians, but the larger chains have struggled to sell their products, and some, such as Chick-fil-A, are looking to compete directly.

Simply put, Beyond Meat does not have a solid recurring customer base. While it had strong initial growth as new customers tested its products, the company has seen its sales level stall and decline. Problematically, its production costs per unit have continued to grow, causing its gross margins to become negative. See below:

Companies can operate with losses for some time if they have positive operating profits (i.e., losses due to interest costs). However, a company that cannot make an operating or gross profit is not likely to survive long without immense change. Beyond's gross margin has fallen so low that it would need to raise product prices by around 20% to earn a gross profit. To achieve an operating income, it may need to double its prices. See below:

Beyond's gross margin is plummeting, and the company is spending far more on operating overhead. Instead of cutting costs and focusing its brand on critical items that could bring profitability, it ramped up its total employee count and R&D spending to develop more non-economic products. More recently, the company did pursue significant layoffs and announced an effort to consolidate its focus; however, I believe this change may be "too little too late" considering its margin position at the end of Q3.

Further, the company still faces immense difficulty keeping its product prices near its competition. In my opinion, for Beyond to be successful, it must be cheaper and (perceived as) healthier than animal meat products. It will likely struggle to compete with animal meat for taste quality since most meat-eaters still prefer meat. However, since it is significant processing and supply-chain needs for making high-ingredient foods like Beyond's, it will likely never be lower cost than animal meat, particularly as inflation remains a supply-chain factor. In a time when many people are frustrated with rising grocery prices, it is even less likely they will spend extra on Beyond's products.

Will Beyond Meat Survive 2023?

Overall, I believe Beyond Meat's business model has too many critical issues that the company is unlikely to turn itself around quickly. This includes falling sales and rising costs, a challenging problem to fix simultaneously. Fundamentally, this issue appears to stem from a poor customer base and processing-intensive business model, although rising inflation and weakening macroeconomic conditions have certainly worsened the problem.

That said, Beyond Meat did end last quarter with decent working capital and cash. If it can slow its cash-flow losses, it could extend its life. Theoretically, if Beyond Meat can slow its burn rate, it may survive long enough to consolidate and re-focus sufficiently to become a profitable enterprise. At the end of Q3, Beyond still had $605M in working capital compared to a $380M net loss TTM. See below:

Last year, Beyond faced rising inflationary costs and elevated overhead costs due to its rapid employee growth. This year, I expect we will see Beyond make a considerable effort to consolidate toward more profitable products and re-price its products to stop its gross margin deterioration. Those changes will likely lower Beyond's sales further, but that is not necessarily bad since it has been losing money per product sold. Given its relatively strong working capital and cash position, if Beyond can slow its losses, it may survive 2023.

Beyond also has $1.13B in debt, nearly the same as its market capitalization. This debt does not pay interest as it is a convertible bond due in 2027. The convertible bond has lost considerable value recently since it is generally unlikely to reach par by then. Still, I do not believe Beyond will manage to receive more debt financing at a reasonable interest rate. The company could raise capital by diluting equity, but its dilution level would be very high, given the immense compression of its market capitalization over the past two years.

The Bottom Line

Overall, I am bearish on BYND stock and doubt it will carve a long-term bottom soon. Its threat of immediate bankruptcy is seemingly low, given its decent working capital position at the end of Q3. Further, I would not short the stock before its Q4 report comes out. If the company reports significant progress in reigning costs and mitigating losses, it may survive long enough to become profitable. This possibility could be sufficient to justify Beyond's current valuation, which is generally low compared to the total addressable market.

Still, I do not believe Beyond's product caters to a strong enough recurring customer base in the long run. Further, without weakening the quality of its product, it may never manage to compete with animal meats for lower prices. If its Q4 report shows continued margin deterioration, I may be more willing to bet against the stock since it may not survive 2023. BYND is so heavily short-sold today, even after the recent squeeze, that a significant temporary squeeze risk remains. See below:

While I am bearish on BYND, I believe it may be too risky to short due to its squeeze risk. At this point, the odds of the company going bankrupt over the next two years seem larger than the odds of its survival, but it is certainly not a "sure thing." Beyond's recent changes imply it is taking more aggressive measures to stem losses sufficiently to extend its life. Finally, I expect the company's Q4 earnings report to be a crucial "make or break" report that will likely bring significant volatility in either direction.