As always, investors need to watch the business and not the stock.
It's been a disappointing journey for shareholders of plant-based meat company Beyond Meat (BYND -1.76%). Shares are down 96% from their all-time highs in 2019. It was a disappointing journey -- that is, until things started getting interesting over the last month.
In just one month, Beyond Meat stock is up 34%, outpacing the 2% return for the S&P 500. It's one of the best performances the stock has had in a long time. Could the outlook for shareholders finally be improving? Is this a rip worth buying?
Unfortunately, I believe the answer to these questions is no -- nothing has happened in the last month to improve Beyond Meat's prospects. To the contrary, I believe there are good reasons to sell today and the current rip could be an opportunity to sell at a slightly better price.
Two reasons to consider selling Beyond Meat stock
The first reason to consider selling Beyond Meat stock is that virtually every important financial metric is headed in the wrong direction right now.
For some time, one of the only metrics holding up well for Beyond Meat was its points of distribution. However, in the first quarter of 2024, this number started declining as restaurants and grocery stores dropped the company's products. In the first quarter of 2023, its products had 146,000 points of distribution. But in Q1 2024, it was down to 130,000.
Q1 sales volume for Beyond Meat was down a more discouraging 16% year over year. And as has been the trend in recent years, the company's gross profit margin continued to be poor and led to unsustainable losses overall (the chart below shows the trend but isn't up to date with the latest quarterly numbers).
Note: Chart does not reflect the most recent quarter. BYND Revenue (Quarterly) data by YCharts
Beyond Meat's management just raised prices in April and May and these price increases aren't reflected in the Q1 numbers. But with sales volume already plummeting, it's hard to believe that things will get better by raising prices -- typically businesses raise prices when consumer demand is high.
Founder and CEO Ethan Brown believes that consumer perception about the healthiness of plant-based meat has dropped. Beyond Meat's reformulated beef recipe is designed to address these health concerns and Brown is optimistic this will improve demand. But even if that's the case, the company will likely have to spend significantly to get its message to consumers. And for this reason I believe steep losses are still likely.
The second reason to consider selling Beyond Meat stock is its debt in light of its worsening financials.
Back in 2021, Beyond Meat raised $1 billion at a 0% interest rate by issuing senior convertible notes -- not necessarily a bad move at the time. However, these notes are supposed to convert into Beyond Meat stock at $206 per share in 2027. The stock would need to increase about 25 times in value over the next three years for this to happen -- extremely unlikely.
Therefore, Beyond Meat will most likely need to repay its $1 billion in notes. From a cash-flow perspective, the company is currently burning far more than $100 million annually. But it would need positive cash in the neighborhood of $300 million annually to repay the debt by itself from the business. That's a nearly impossible scenario, considering that's close to what the company generates in annual revenue at this point.
What to do now
To summarize, Beyond Meat's financials have deteriorated in recent years and an improvement might not be anywhere close. Meanwhile, the clock is ticking on its substantial debt load. For these reasons, it could be prudent to sell shares of Beyond Meat. Its recent surge in price helps shareholders have a better exit.
Observant readers will notice that I personally still hold my shares of Beyond Meat but not too much should be read into that. With my position down close to 90%, what I do with my Beyond Meat stock is inconsequential either way. It could go up five times in value and still represent less than 1% of my portfolio's value, giving me little incentive to hold. But if I sold, the proceeds would be so small that it wouldn't matter much either, giving me little incentive to sell.
Ultimately, I chose the lazy approach for myself. But for Beyond Meat shareholders with larger positions, it could be a good time to sell. The price is up over the short term thanks to investors looking for short-squeeze opportunities. Therefore, the boost is likely to be short-lived.
Jon Quast has positions in Beyond Meat. The Motley Fool has positions in and recommends Beyond Meat. The Motley Fool has a disclosure policy.
