Beyond Meat Continues to Plunge Back to Earth
Beyond Meat is by far the biggest IPO hit of the year, skyrocketing from an opening price of $72 all the way to $239.71 in less than 3 months. It’s falling back to earth now.
IPOs are dominated by traders more so than mature stocks, and this is really the case with the hot ones. As Beyond Meat’s new stock continued to rise, analysts were baffled by just how overvalued this stock was, especially since they haven’t even become profitable yet.
Without positive earnings, they can’t use their usual price to earnings ratio, so they have to rely on revenue projections. Analysts felt that Beyond Meat had been trading well beyond even the most generous tolerances for this, and in terms of the longer term, they were probably right, but this was not about next year or the year after but what was going on at the time.
Traders can bid up stocks quite a bit, and Beyond Meat’s first three months were a great example of how far these things can go when they get enough momentum behind them. This sort of valuation doesn’t tend to be sustained though as there will come a time when the ride is over and it’s time to get off. As these traders book their profits, this reverses the initial frenzy and equalizes.
This does not mean that these moves are in any sense less legitimate, and in fact making money this fast makes stocks like this considerably more profitable overall, but you can’t just set and forget them like so many people want to do.
Any time you have half of the shares out on a company loaned out to short sellers with an IPO, you know that there is a huge amount of trading interest in it. People will do this with distressed stocks as well, but with Beyond Meat, this instead told a tale of a huge trading interest on both sides of the ball, and based upon how this stock went up, we know that it was being driven by a lot of short-term interest on both the long and short side.
Predictably, the time came when the selling pressure took the momentum away from the buying pressure, and with so many positions up a lot and so many of those who hold them only around for the good times, once the good times ended, we were in for a real scramble to get out.
Since Beyond Meat rose as much as it did, the reversal was also expected to be pretty dramatic as well, and it certainly has been. Beyond Meat has now lost over half of its bloated value that it had at its highs in July, and hasn’t shown any real sign of stopping yet.
Many people looked to the business to provide them information on where we may be going, and while these tidbits such as Beyond Meat’s striking new distribution deals affect the company’s long-term prospects, and to some degree their stock price, this is not what this game is about here.
Much in the same way that Bitcoin and other cybercurrencies rose phenomenally and then came crashing down when the profit taking started taking over, the market itself can cause some pretty good moves in both directions with little or no regard to what may be going on with the company. Bitcoin doesn’t even have anything that corresponds with it in the real world, and that certainly did not stop it from moving as much as it did.
Anyone actually looking to invest in a stock like this longer-term needed to be aware that we were going through a Bitcoin-like phase in its trading, and anything short of waiting for the dust to finally settle would have been a big mistake. To trade a flyer like this, you need an exit plan of a similar duration to make this work, and plenty of traders who are now out did.
As the Price Declines, This Serves to Eventually Ease Selling Pressure
There are, of course, plenty of people who got stuck on this, and when traders borrow your shares from you for shorting purposes, it is not other traders that lend it to them, it is people who are in for a longer period than this.
Beyond Meat is no longer up by all that much, as we’re quickly heading down toward its initial trading price. It is hard to say when this will stop, although in a case like this you want to look at its move up as trading interest that later gets put at risk when this trading interest eventually leaves town and exposes the naked price of the stock.
The way down can be as profitable and exciting as the way up, as more and more short sellers jump on and borrow stock to sell. This of course adds to the normal momentum caused by profit taking, and the two forces together can create some pretty impressive momentum indeed, as we have seen.
Even those who have an exciting longer-term outlook with this company should not have ridden this move down, and while it may have been appropriate for them to take the ride up, when these things turn, everyone needs to head for the door, or at least everyone that doesn’t want to take a haircut.
While we might want to view temporary gains as either being fleeting or playing with house money, it’s actually our money to take if we wish, and since we’re in this to make money, we should never rule out doing exactly that no matter how badly we may wish to hold it longer.
A lot of investors may be thinking down the road too much though, and even if the stock does make it over $200 again one day, it is simply foolish to hold a stock with this big of a chance of a big decline. Even if you had a broader view and wanted to see enough before exiting, below $175 foretold the future plainly enough that anything below that was heading toward the ground as the trading forces that had caused it to decline this much kicked in even more.
Once this move is done, the nature of the way that it has declined will likely cause it to be oversold, just like the trading interest had it so overbought back when it was on the way up. This can both present a good entry point for investors and an entry point for traders looking to ride it up again after the overselling wanes enough to give up control again.
The actual business conditions of the company have looked good since the IPO, with their adding several significant placements and creating some fundamental momentum of its own. Some of this may have served to slow the stock’s decline but have been no match for the trading momentum, as evidenced in it going from $234 to less than half of that now.
When you get the two moving the same way, as is the case with the concerns of a new competitor in the meatless meat market, Canada’s Maple Leaf Foods, you will see a price drop for sure, and that’s exactly what is going on right now.
In just the last 9 days, Beyond Meat has dropped from $145 to $109, and given that people are becoming more concerned about how the company will do over the next few years as far as revenue goes, this does not bode well for a comeback right now.
Beyond Meat didn’t need this help to move further down though, and this news about Maple Leaf getting into the meatless market really hasn’t added that much to this recent decline. This only came out on Thursday and while the stock is down $14 since, this is still only a small percentage of the overall decline over the last 3 months.
The Way Beyond Meat Rose Had the Story of its Decline Built In
We knew that something was really up when the underwriters set the price of Beyond Meat at $25, and it ended up opening at $72 per share. This means that even the $72 is elevated beyond what we could deem to be the stock’s fundamental value, and while underwriters do aim to miss the actual trading price on the low side, they don’t shoot for anywhere near this low, as in the company only getting a third of what the stock traded at on the first trade and on the first day.
This was a huge opportunity missed and something between $50 and $60 would have been a more suitable issue price, but at the same time, if the institutions that buy pre-issued stock balk at such a thing, the choice may be between $25 and nothing.
The reason why institutions may not have wanted to pay this higher price is that they often will look to actually hold the stock for a while and therefore aren’t looking to trade it in the way that it needs to be, to hold during the run up and dump it once this initial momentum ends.
This only has to do with the company though and has nothing to do with what goes on in the secondary market, on the exchange, but it does tell a story and the story is that you need to be extra careful with it given that a lot of stock is out there at the issue price. We actually saw some of that go on the very first day, which was a down day for Beyond Meat. Even a week later, it struggled to stay above $60, and it took almost a month before it really started to take off.
Those who are either invested in it or plan to need to realize that while the meat substitute market is expected to explode from its $1 billion size it is now to $25 to $40 billion in 10 years, this does not mean that Beyond Meat’s revenues are going to explode as well. As the market size grows, so will Beyond Meat’s competitors, although this is at least a market where a company can really distinguish itself on the basis of quality, and this is especially the case with meat substitutes where taste is paramount.
When Beyond Meat climbed past the century mark, analysts were already chirping about how overvalued this is in comparison to a reasonable measure of Beyond Meat’s future business prospects over the next few years. That’s not what drives stock prices in either the short or long term, as people aren’t buying it for its dividends, but this analysis does provide a backstop where value investors may step in.
A backstop is what cryptocurrencies didn’t have on the way down, and it was an open question as far as how far they could fall, even though there are other forces involved such as people seeing the price drop so much and eye how much it has fallen as an opportunity, in addition to seeing selling pressure wane as the fair weather people sell off.
Company stock is supported by book value if nothing else, but Beyond Meat’s fundamental value is well below even its current price by most accounts. We may also want to question these market projections, as this is very much a niche market catering to those who choose not to eat meat but like the taste. While this market may grow, it is a little difficult to imagine it growing by multiples of 25 to 40 in 10 years.
Since we are in a real sense pricing this in, as we proceed and don’t hit the marks that are necessary for this massive growth to happen, the company may be doing just fine but fine won’t be enough in this case and this can cause a further devaluation of the stock.
When we combine market concerns with the concerns about greater competition that is only starting to emerge, and the fact that it remains quite overvalued fundamentally, this is not a stock that investors should be looking at now or especially be in. There may be a time and a place to invest in this company but we’re not there, nor were we there at any point in the stock’s history, including at the pre-issue price.
If you were looking to invest in Beyond Meat and did get it at $25 and still own it, you have made a big mistake by not selling it at a price much higher than it is now, because you can always buy it back much lower.
We’ll have to see just how much lower it will go, but for those who are watching and waiting, we do have all that short interest to account for, enough to cause an inflated rebound by short sellers taking profits or managing risk once the balloon starts to rise again. As it was with the decline, this is not a matter of if but when, and the when part is where skill and patience come in.
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
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