Source: US Stock Research Society
Abstract: Hype and asset bubbles have occurred again and again. The latest example is the surge in Beyond Meat's stock price.
When we look back on past hype and bubbles like cannabis stocks and bitcoin, we see many similarities, although we may not have reached the peak of inflation expectations.
Beyond Meat will not only face competition from Impossible Burger or Nestlé , but also from many other companies launching similar products.
Investors can only be losers now, and even traders should be careful not to be burned by "things other than meat".
Beyond Meat hyped company
To understand what we are talking about, we must first look at this company. We have gone further than most people have in typical hype – by focusing on potential companies, their products and fundamentals, not just on news headlines, developments in asset prices or the hype itself.
Beyond Meat was founded in 2009, a California startup and is now a food company that produces, sells and sells plant-based meat products in the United States. The company's mission is to move from animal meat to plant-based meat. Beyond Meat's products include Beyond Burger, Beyond Sausage and Beyond Beef Crumbles, and are sold in more than 30,000 retail and food service outlets worldwide. The company has 250 employees and achieved revenue of $88 million in 2018, but has not yet achieved profitability (losing $30 million last year). Analysts estimate revenue in 2019 was $220 million, ranging from $210 million to $232 million.
Looking back on the past few weeks and stock price trends, every rational investor will come up with a simple idea: from the time of IPO to the present, there must be some fundamental news that proves that the stock's valuation is 5.5 times higher than it is currently. On Thursday, the company released its first quarter earnings report, causing its share price to rise 40% the next day. However, when comparing real income and earnings per share with expectations, we can see that the company's revenue and non- GAAP ratings per share are likely to exceed expectations, but these two figures do not justify the 40% increase. Beyond Meat's revenue is expected to exceed expectations by about 3.5%, while non-GAAP earnings per share is expected to exceed expectations by about 7%. U.S. GAAP earnings per share even showed a loss of $0.95, a difference of $0.80 from expectations.
One can speculate that if the IPO price is so outrageously wrong and the underwriting company's valuation of business other than meat is too low. But the basic data does not support this assumption. We have also not seen any fundamental information in the past few weeks that justify such a large price increase, and we may have only one explanation left: We are witnessing another hype.
Current hype
As the starting point for any hype, we always need an innovative trigger point and a new, exciting product, as well as a compelling story built around that product. Aside from meat, we have an exciting new product: burgers and sausages are just like meat, the difference is that they are not animal-based, but plant-based. However, just one new product is not enough, as new products are being launched time and time again. What needs to be more important is fascinating stories.
Only when expectations for an asset reach astronomical numbers will there be real hype that leads to an asset bubble. Only in this case can asset prices soar to reflect these completely unrealistic expectations. In Beyond Meat, we see several elements of such a compelling story:
has a current market value of over $1 trillion and is expected to grow in the next few years. It’s not hard to imagine what can be achieved more than this besides meat taking market share and generating billions of dollars in revenue.
Our current trend is to eat healthier foods that may stay away from animal meat. Based on these trends, some experts believe that the meat market will end and a complete revolution will take place in the next 20 years.
JPMorgan Chase (seeing business outside of meat as an extraordinary opportunity and seeing the company as a real disruptor. Jefferies believes Beyond Meat is also in a position of rapid and sustainable growth, and Barclays even believes that this has the potential to revolutionize the entire market. Given the market expectations, the company's market capitalization will grow 100 times over the next 15 years, and business revenues other than meat will reach billions of dollars, and extremely high valuations are justified.
We certainly have all the materials needed to create a compelling story, which could lead to Beyond Meat’s astronomical figures and nearly unlimited growth expectations. But that itself isn’t enough to create bubbles and hype. There is a very important role in the mass media: If I had to study the meat market, expect future and potential revenue, then we would never see a hype, and most people don’t even know how to analyze the company or where to find information or more important – and never even hear about Beyond Meat. This compelling story must be spread through mass media. We can start with the data from Google Trends: Investor interest soared before and after the initial public offering (IPO), but search interest is still several times as high as before the IPO. Search volumes in different countries and categories are still 5 to 10 times as high as before the IPO.
We are also at a time when many newspapers, radio stations and TV shows and mainstream media have reported this incident. As far as I know, in Germany, people can only buy meat products for a short time on Metro and Lidl, but the retailer obviously completely underestimated demand, which has caused some anger among consumers. Although very few people actually bought these products or understood "Beyond" Meat, but many TV stations and newspapers have reported on the incident in recent days and reported on Beyond Meat’s great success.
Apart from mass media coverage, forming very similar views is also important for hype. Regarding the search for alpha, we found bullish ratings before the IPO, but in the past few weeks, most ratings have been very pessimistic, and the comments I have read so far, I think are quite mixed. So, at least in the search for alpha, the consistent bullish sentiment necessary for hype has disappeared. However, as a whole, Investor sentiment is very optimistic. STOCKTWITS has a 54% optimism (almost 100% at the IPO). We see strong signs of forming very similar views, we don't consider investment-related websites, but the possibility of increased and bullish media coverage may be greater.
Difficult forecasts, competition and other risks
I think, besides meat and its There are many problems that investors may face in the coming years—including litigation, dilution of outstanding shares, competition or scandal—but I will only pick out two major threats.
Problem
We all know it is difficult to make predictions—especially for the future. But that's what we've been doing. If I try to predict the future of a company that has been around for decades, or if I try to predict the future of a young, fast-growing company, there's a big difference between the two. The current expectations of future revenue and profits for industries outside of meat are the result of several assumptions that are doubtful. Investors try to estimate how the entire industry might develop over a long period of time, but seem to completely ignore many different factors that can have a huge impact on the outcome. Competitor behavior, new trends in how we consume and eat, or several scandals, may all be for Beyond Meat's business model has a significant impact. I basically know nothing about that market and will not make any predictions. I just want to point out that there is a good chance that things will come out completely differently than imagined, and that is always dangerous when both predictions and estimates are built on the best scenarios imaginable.
Competition and Moat
The second major problem is the company's peers and competitors. Even if the predictions of potential trends are correct, and we will see a major shift from animal meat to animal meat, companies other than meat are and will not be the only ones operating in this segment now.If this is the beginning of a big trend, we will see many competitors entering the market in the coming years because that's how capitalism works. We also don't know if the competitor's products will taste better or if companies with huge marketing budgets will make it difficult for Beyond Meat to succeed. Currently, Impossible Foods is Beyond Meat’s biggest competitor, but there are other major competitors in the food market, which may be the more serious competitors of Beyond Meat. Last week, Nestlé announced plans to launch a plant burger, and other companies may follow suit.
As long as Beyond Meat does not manage to create some form of economic barrier around its business, it will be difficult to achieve the profitability investors are currently hoping for. While some investors may not want to hear (or simply don’t want to think about it), the “beyond meat” business hasn’t really created huge economic barriers. For such a business, switching costs and network effects are almost impossible, and as a small company, cost advantages are currently unrealistic. I've only seen the possibility of protecting product patents in some way (it seems rather impossible, if possible, not forever), or building a strong brand around the product to keep a distance from competitors.
Inflation expectations peak?
may realize that I missed the third step, the last step in the description above, which included aspects of new era thinking and fear of missing out. We do see the first sign of new era thinking, some think we’ve seen a revolution in the entire market, and some experts have seen the end of the meat market as we know it. Whether this happens or not, it shows the characteristics of new era thinking, which is almost always dangerous because it leads to hype and extreme bubbles.
For example, the extreme rise in stock prices seen in recent weeks shows that people's concerns about missing opportunities already exist, and people invest only because they worry about never getting similar buying opportunities again. “The coverage in the media captures the excitement surrounding innovation and reinforces the need to be part of innovation or be left behind.” When you read that many people obviously invest in Beyond Meat and write about their profits, you may feel like the world’s biggest fool, which increases people’s fear of missing out on opportunities.
I'm not sure if we're reaching the peak of over-high expectations, and while the valuation is already ridiculous, I think this hype may last longer (maybe weeks, or months--I don't know). Although the mass media has already reported on this, there is still a lot of room. In December 2017, when the Bitcoin craze reached its peak, compared the search volume of Beyond Meat (red line) with the search volume of "bitcoin" (blue line), we saw a huge difference and also saw how much vitality a craze can bring.
Conclusion
There are absolutely no stocks to buy except meat, because investors can only relax now. I also don't recommend shorting the stock, as I think the hype may continue for weeks or months. As the saying goes: The market may lose its rationality much longer than you maintain your debt repayment ability.
My conclusion is to stand aside and observe and learn how bubbles are generated and burst. Blockchain may be what the Internet looks like during the Internet bubble – potential technological revolutions will continue to exist and change our lives, and perhaps some cryptocurrencies will continue to exist. But it is certain that more than 99% of existing cryptocurrencies will be worthless, and the possibility of Bitcoin, Ripple, Ethereum or Litecoin becoming one is quite high. The same principle applies to Beyond Meat. Perhaps meat made from plants is a revolution that will change the way we eat forever. But it is difficult to predict whether this will happen, and it is even more difficult to predict which company will win. And now, even if Beyond Meat is one of the major players in the market for its market capitalization of nearly $10 billion (at the time of writing) over the next 10 years (and even longer), you may suffer losses.
