Amid the bashing and debate about the post-IPO stock performances of Uber and Lyft, Beyond Meat quietly delivered the most surprising post-IPO performance to me, in a positive way.
The company sold IPO shares at $25 and the stock is trading at around $77 relatively stably for the past week, more than 200% of gain. The market cap is currently $4.45B.
I analyzed Beyond Meat’s S-1 form when it was first available last November. Back then the story that the S-1 was telling was not very compelling. Only two years of financial numbers were available. The last complete fiscal year was that of 2017, ending on December 31st. There was 9-month performance ending on September but there was always doubt that companies would pump lots of marketing and sales to boost such numbers so I discounted the impressive 9-month year-over-year growth back then.
The company also suffered from several weak links:
- Gross margin was negative, i.e, they sell products at prices lower than production and distribution costs. This is before even one factors in the marketing and operational costs.
- The company relies on a single high-quality protein supplier called Roquette, a French company. In the first three quarters of 2018, 80% of the bean proteins the company used was from this single company. The company claimed that it’s a risk but so far they could only find this supplier that could meet their quality standard. This is huge supply chain risk both in stability and pricing power.
- Though proud of being an R&D-driven company, it 355 employees back then only include 44 that are in R&D. 233 are in operation, signaling that it’s no different from other food companies where operation is gonna be heavy.
Over all the only bright spot was the impressive 9-month revenue growth of 2018 versus 2017. Obviously I was not part of the roadshow so I wouldn’t be able to judge if that was organic.
Then the company also was late to IPO. It took them almost 5 months. Later we learned that the main reason for the delay is dispute with one of their shareholders, industry giant Tyson Foods. There had always been potential conflict of interest when the company took Tyson Foods’ money. And it wasn’t a small one. At the first S-1 form filed in November, Tyson Foods held 6.6% of pre-IPO shares through Tyson New Ventures, LLC, having invested a total of $23 million between 2016 and 2017.
Axios reported that the conflict of interest manifested itself uglily during the pre-IPO process as the food industry giant announced the intention to developed its own bean-protein-based meat products. Eventually Tyson Foods sold most if not all its shares.
With that road block removed, Beyond Meat finally started trading in early May. I did not follow up enough to review the revised S-1 form, but apparently the 2018 revenue growth and gross margin improvement were both real and organic:
As seen above, the gross margin in 2018 turned positive and reached 20%. Distribution cost of fresh food impacts this industry a lot and the gross margin usually improves as the sales continue to expand. It gets after all much cheaper, unit-economy-wise, to deliver and store meat products in a single super market location if the volume is higher. Wall Street apparently saw this improvement continue.
Now that the gross margin story is retold, the growth in revenue really stood out: almost 170% revenue growth (2.7X) from 2017 to 2018. As sales deepen in all existing channels and new channels convert, it’s easy for an analyst with industry database to project a rosy picture of continued triple-digit percentage growths in the years to come, therefore the current impressive market cap.
Overall I’m very happy for the company, the industry and hopefully this planet. This is one of those few occasions that you’re happy that you’re wrong. (And I claimed innocent as always due to insufficient non-private data back in November when I first analyzed this company.)