Article by Harrson Griffin for the Times & Transcript published on July 5, 2019

Beyond Meat (BYND) has made a lot of headlines recently. On May 2nd, the company held its record-breaking initial public offering (IPO).

This means the stock became open to public investors. Initially, shares were offered at $25.00 (USD). The very first trade of the stock was at executed at $45 (already an 80% return). Since then, shares have climbed as high as $200! This would have been an incredible 700% return in less than two months. Numbers like that certainly get people excited, however these investors may be getting ahead of themselves.

maude frederique lavoie haAhKtXcdgM unsplashFirst let’s consider the company. They truly are innovators, scientifically designing plant-based products to replicate animal protein. They make burgers, sausages and ground beef without using any meat. The success they have had with customers is undeniable, sales grew 170% in 2018 and even more so far in 2019. Likely aiding that growth is the potential health and environmental benefits of this plant-based meat relative to traditional products. This author is neither a nutritionist or a climate scientist, but he does understand that any perceived benefits only serve to strengthen this brand. All of this puts the company on solid footing for continued success. But does that translate to growth in the stock price? Not necessarily.

It is very important to remember that a stock price is not based on what the company has done in the past, but what it is expected to do in the future. There are a lot of estimates about what BYND may be able to accomplish over different time frames, but let’s consider the highest estimate for 2019 sales. This is JP Morgan’s estimate of $233 million, a 165% increase over last year. Let’s imagine that on average this is what the market expects of the company (the market being anyone who is investing or considering investing in BYND). What happens if they grow sales at 100% this year? This still seems like a pretty phenomenal number, right? Well if the market had priced the stock with the expectation of 165% growth, 100% would be a sign that it is not living up to those expectations. All else equal, the stock price should fall.

Looking at sales growth over one year is just the tip of the iceberg and in reality, there are countless other forward-looking factors that will affect the stock price (future expenses, profits, cash flows, etc…). The point to remember is that stock prices are based on expectations and will only react to surprises, either good or bad. When we hear news about BYND getting a contract with Tim Hortons, for example, this is not necessarily a surprise given the exorbitant growth the market is already expecting. Everybody already knows BYND is likely to be gaining new contracts, so there is no reason for the stock should react.

It should be mentioned that despite JP Morgan’s high expectations for BYND, they do not recommend buying this stock as it is simply too expensive. This suggests that, if the market is being rational, it is expecting some level of performance higher than JP Morgan’s estimates. However, it is also possible that the market is being irrational. When a stock is up 80% on its first ever public trade, people get excited. Some investors want to participate simply so they don’t miss out. This herding behavior can lead to out of control valuations and stock prices becoming untethered to company performance.

Beyond Meat really is not doing anything wrong, and as a company they will probably be very successful. The problem is that the current stock price is implying a level of performance that they likely cannot live up to. When you buy a stock, it is not enough to think that the company will be successful. It is very important to consider whether they will have enough success to justify their current stock price. Exactly how to do that is beyond the scope of this article (for the curious reader: popular valuation methods include price multiples and discounted cash flow models). The point to remember is that just because a company is growing does not mean the stock price will follow.