Over the past six months, Beyond Meat’s shares (currently trading at $2.80) have posted a disappointing 16.4% loss, well below the S&P 500’s 16.2% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

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Why Do We Think Beyond Meat Will Underperform?

Even though the stock has become cheaper, we're cautious about Beyond Meat. Here are three reasons we avoid BYND and a stock we'd rather own.

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. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Beyond Meat’s margin dropped by 18.5 percentage points over the last year. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business. Beyond Meat’s free cash flow margin for the trailing 12 months was negative 41.6%.

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 $125.3 million of cash over the last year, and its $1.28 billion of debt exceeds the $104.7 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

Beyond Meat doesn’t pass our quality test. After the recent drawdown, the stock trades at $2.80 per share (or a forward price-to-sales ratio of 0.8×). 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. We’d recommend looking at one of our top digital advertising picks.

Stocks We Would Buy Instead of Beyond Meat

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