Key points:
- Beyond Meat’s stock price is down another 40% on the back of the results
- This is now a 76% loss over a year
- The basic problem is the lack of Warren Buffett’s moat
- Beyond Meat Looks Increasingly Bearish, Here’s Why
Beyond Meat (NASDAQ: BYND) stock is now down 76% at least over the past year. It was down 14% yesterday and another 23.5% so far premarket this morning. This is not what folk want to see in their investments of course. So, what is it that has actually gone wrong?
The answer is the lack of that thing that Warren Buffett looks for in an investment – a moat. That is, something to protect the profits from competitive pressures. In the absence of one of those it’s extraordinarily difficult to make consistent profits. But profits are what we’re all investing to gain access to – so companies without a moat, BYND being an obvious example, turn out to be not good investments.
This is what the basic problem here at Beyond Meat is. The business sector, that’s just fine. We all know there’s a move to replace meat in the diet. This is also among the younger among us so there’re likely to be decades of this change in tastes to come. Food technology has advanced to the point that more interesting things can be made out of pea protein (and the like, different companies use different base products).
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There’s a growing market and significant consumer interest. Great, so that decision isn’t wrong, the one to be in this market.
However, we do have to recall what it is that Warren Buffett has said he looks for when deciding upon purchases for Berkshire Hathaway. He likes a business with a “moat”. That is, some protection against competition. It can be something as simple as a brand name – See’s Candy. Or state by state regulation and licensing – Geico and car insurance. But his analysis is that sure, great profits are possible in varied lines of business. But what’s to stop someone copying you and coming and eating your lunch?
Without that moat there isn’t anything. So a business can grow, be in what is a growing sector, and yet not make good profit because the margin gets competed away. Which is exactly where plant based meat substitutes are. There are no significant barriers to entry. No established brands to shrug off competition. The chemistry of making the foodstuffs varies a little across companies but not all that much. There are also many ways to achieve the goal.
Which is where Beyond Meat is. The just announced results are a non-GAAP EPS earnings miss of 60 cents at minus $1.58. Revenue is only slightly off at $109.45, $2.15 million down on expectations. Net loss as a percentage of revenues was 91.8%.
Revenues were up only 1.2% YonY. So Beyond Meat isn’t growing into a dominant position in an expanding market. Margins are getting worse, not better. There’s no moat there.
Now, it’s not true that we all have to, always, take Warren Buffett’s advice. He has made his mistakes and missed more than the one opportunity himself. But the basic idea, that profits have to have some protection around them if they are to persist is simply a truth. Companies without a moat will find margins competed away.
The future value of Beyond Meat depends upon finding that moat – trading positions need to be based on whether there is one and whether the company can find it.
