The past six months haven’t been great for Beyond Meat. It just made a new 52-week low of $4.19, and shareholders have lost 41.2% of their capital. This might have investors contemplating their next move.

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why you should be careful with BYND and a stock we'd rather own.

Why Do We Think Beyond Meat Will Underperform?

A pioneer at the forefront of the plant-based protein revolution, Beyond Meat (NASDAQ: BYND) is a food company crafting innovative, sustainable, and delicious alternatives to traditional meat products.

1. Demand Slipping as Sales Volumes Decline

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

Beyond Meat’s average quarterly sales volumes have shrunk by 9.1% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable.

2. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Beyond Meat’s demanding reinvestments have drained its resources over the last two years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 37.6%, meaning it lit $37.62 of cash on fire for every $100 in revenue.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Beyond Meat burned through $104.9 million of cash over the last year, and its $1.22 billion of debt exceeds the $122.3 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Beyond Meat’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Beyond Meat until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of Beyond Meat, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at $4.19 per share (or 0.8× forward price-to-sales). The market typically values companies like Beyond Meat based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. Let us point you toward CrowdStrike, the most entrenched endpoint security platform.

Stocks We Like More Than Beyond Meat

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