Beyond Meat: Examining the Stock Surge after the Earnings Call

It is too early to say if Beyond Meat is bouncing back, but the brand did enjoy a small rally since its earning call last week. Far from being out of the woods, why did The Street respond positively to CEO Ethan Brown's call? Here are VegTech? Invest CEO Elysabeth Alfano and Chief Investment Officer Sasha Goodman 's comments on analysts' response to Beyond Meat, including a bit of the stock's history.

1. Wild Ride IPO

Beyond Meat IPO'd during an exuberant time in 2019 with the stock rising 163% in one day, the largest rise of an IPO stock since 2008. It was exciting to say the least. The valuation back then, however, was more aligned with the tech companies of the .com bubble than with consumer staples/food companies, per the image below. Tech companies trade at higher multiples, but also have faster growth trends. Food companies tend to have slower growth than tech, although the new sector of Food Tech is a blend of the two. The market has since corrected the Beyond Meat valuation, bringing the stock price in line with consumer staples companies, despite its strong brand, category leadership and innovative nature.

Why?

2. Beyond Meat Through an Analyst's Eyes

Founders tend to lead with talk of a dream to change the world. While CEO Ethan Brown may accomplish his vision of shifting the global food supply system away from inefficient animal protein in time, Wall Street analysts don't want to hear about a dream for the future. They want to see consumer demand, revolutionary IP and more than anything they want to see solid business metrics and profitability.

Analysts typically want to see revenue growth before issuing a "buy" rating, and Beyond Meat's revenue growth was down 18% in 2023, as they took $343M for the year.

Further, analysts usually rely on evaluating a company, in part, on what is known as a P/E ratio, which is the share price divided by earnings. If a company doesn't have earnings, as is the case of Beyond Meat, the mathematical equation is share price divided by a negative number. This makes the ratio difficult to know what to do with since it doesn't give the analysts a number that works.

Add this to the fact that many analysts, less now but particularly the case a few years ago, may not see the need to shift away from meat and haven't bought into any particular dream. They aren't food systems experts, don't perhaps follow the poor environmental data around the current food system based on animal proteins, and may not be comfortable with a CEO talking about a future vision when the current financial metrics for the company aren't gelling. Hence, many analysts downgraded the stock.

3. Consistency for the Win. Confidence for the Bigger Win.

If analysts aren't interested in the dream and are deprived of their basic revenue growth and P/E calculations, what are they to go on to analyze a company and give their ratings? Earning calls. More specifically, analysts look to the CEO to accurately give guidance for financial exceptions - will they be profitable and, if so, by how much? - for the quarters to come. When those financial quarters arrive, they expect the CEO to have correctly predicted the growth (or loss) for the company because they expect the CEO to know their business well enough to be able to forecast three months to a year out.

Much of earnings calls is about managing analysts' expectations. Consistently hitting the quarterly expectations in earnings calls will give analysts confidence that the CEO has control of the business. Consistently missing the quarterly expectations and not being able to right the ship quarter after quarter will do the exact opposite.

There may well be some understandable reasons for Beyond Meat consistently missing expectations in previous earnings calls. The difficulty of bouncing back with a strong balance sheet after Covid restaurant closures, supply chain disruptions, China's economic crash, global inflation, attacks from the meat lobby and general societal angst sending people running for less expensive options that are tried and true, can't be denied.

But that's not analysts' problem. They want to know that management can champion the vicissitudes of the market by doing what is necessary to lead in difficult times. Missing expectations for several quarters in a row lead analysts to give Beyond Meat a negative rating.

In the Q4 February 27th Beyond Meat earnings call, the guidance from Brown was that decline in revenue growth would stop. In 2024 they "expect net revenues to be in the range of $345 million," almost the same as 2023.

While this is good news, stabilizing sales isn't exactly revenue growth.

4. Path to Profitability

Yet, Beyond Meat received positive feedback from analysts in the recent earnings cal, even though sales were down and future guidance was flat. Why? Because even though U.S. sales were down, the company still beat the set expectations and were down less than expected, with $73.7 million rather than the expected $66.8 million in sales. This is 10% better than expected for U.S. and international sales in Q4. Indeed, international sales were up 22% in retail and 34% in foodservice.

Brown mentioned, "continued traction at McDonald's across countries such as Austria, Germany, Ireland, The Netherlands, UK, Malta, Portugal, Slovenia, and Switzerland."

Meeting or surpassing expectations shores up confidence in the CEO, a key factor in the recent stock price bump in our opinion. In addition, stopping the revenue bleeding is indeed positive news. These weren't the only factors, however.

5. It's Spending, Stupid

So, what was so different about this earnings call? In 2023 CEO Ethan Brown brought operational spending to $107.8 million for the year, compared with $320.2 million in 2022, as noted in the Q4 earnings call. That's a two-thirds reduction in spending giving the company a real shot at profitability. That's action, not rhetoric.

In our opinion, The Street had been waiting to see this kind of leadership from the company since its IPO. It wanted to know if Beyond Meat, beyond the dreams of shifting the global food supply system to be more sustainable, healthy and cruelty-free, could actually run a fiscally responsible company.

They were waiting for a stronger balance sheet and a realistic path to profitability, showing management controlling spending. That's what they got in this last call and, again, the stock was recently rewarded for this.

Beyond Meat was up 31% the day after the earnings call to $9.83 up from $7.52. It surged 106% in after-hours trading following the earnings call on Tuesday, according to Bloomberg. The company beat expectations for Q4, and 2023 was on par with yearly revenue predictions of $315M - $345M, compared to analysts' $343.9M. As of writing, the stock is $8.51.

So, What Now?

Even though operational spending was slashed in 2023, the company continued to innovate. It came out with the clean label, low saturated fat, cholesterol-free, plant-based steak tips in 2023, which were well received.

2024 will see the launch of a new burger as the company innovates for cleaner labels while not sacrificing on taste. Additionally, Brown continues to bring down the price of its burgers to go head-to-head with meat analogues.

Beyond Meat will also discontinue its jerky to focus on company-wide profitability. While partnering with PepsiCo on the jerky may have seemed like a great idea for distribution and a feather in company's cap at the time, logistics or other reasons made it not profitable. The strong management choice was to make the unemotional decision to cut it and focus on a stronger balance sheet. Again, the stock was recently rewarded for this.

Headwinds, however, still lay ahead. Beyond Meat says it has enough cash to fund operations through the next 12 months, but that is all expects to raise additional capital in 2024 through the issuance of debt or equity securities. This could dilute ownership in the company for current shareholders, reduce the market price for the stock and would assume debt covenants and repayment obligations that could adversely impact the business.

This is in addition to the already high debt load of $1.2 billion, surpassing its market cap of around $631 million.

Summary

So how does this all add up? One positive earnings call isn't enough to say if the brand is out of the woods. Based on their own guidance it will take a year to stabilize the loss of revenue growth. Brown has a long way to go, obviously, to bring the company stock price back up. However, if Beyond Meat can reach profitability with innovative products while managing its debt in a volatile economy that is starting to prioritize sustainable supply chains such as theirs, they may be close to turning a corner. We believe they eventually will.

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