Why Beyond Meat Stock Will Drop
I’m sure you have heard of Beyond Meat by now. The stock that IPO’d (initial price offering) in May of 2019. The stock started with a price of just $25 and within weeks it had reached $230. Great for the company and its investors you’d say. This is definitely true, however I consider this as one of the biggest bubbles in the stock market.
Why is Beyond Meat a bubble stock?
The company has reported earnings twice so far. Total expected sales for the year will be around $280 million. At the most recent earnings they reported revenue had grown around 287% YoY. This is a statistic that most companies can only dream of. However, at one point the valuation of company reached $12 billion. In a scenario where the expectations are reached this would put the stock at a price/sales ratio of 48. When high growth companies like Facebook are at 9 or 10 price/sales. Beyond Meat is still operating at a loss too. Anyone that is not completely blinded by quick profits can see this is a bubble stock. It reminds a lot of us investors of Tilray. This weedstock took the same course and crashed down hard shortly after reached highs.
How did the valuation of Beyond Meat get so high?
After being initially placed on a public stock exchange, a company usually gets a six month period where insiders can not sell their shares. In the case of BYND this lockup expires at the end of October (even though with recent earnings came the news of more than three million shares being sold by an insider).
Because of this lockup only ten million shares of the total amount of 50 million are on the market. This makes it very difficult and also very expensive to borrow shares to short the stock. The hype and the low free float of stocks creates an ideal situation for a bubble stock. Investors are unable to short the stock to lower levels while big buyers can easily influence the stock price. Whenever the stock price went up a lot, a big number of short investors have to cover their position and buy back their negative positions. This is what is called a ‘short squeeze’ and it creates even more pressure on the stock.
Recent earnings and consequences for investors
When Beyond Meat shares their most recent earnings report it contained nice growth numbers, but also a bombshell for current investors. While revenue growth YoY had been 287%, it was also announced that some insiders would sell 3.000.000 shares at $160 before the lockup expired in October. At this time the stock price was at give or take $230. The company tried to downplay this fact by also offering 250.000 new stocks that would also be sold at $160.
Needless to say, following earnings the stock crashed about 10%. The weeks that followed have brought the stock somewhat back to earth to around $140, more than 10% below the price of the second offering.
Insiders are technically allowed to sell their shares before the lockup period but this doesn’t bode well for current longs. You should really wonder if you made a right decision to buy the stock above $160 and insiders, that know more about the company than you, deem it a sell at $160 while the price is at $230. The insiders know that hype has taken over at $BYND stock and pushed its price far, far above what it is actually worth. The insiders agree and want to quickly cash out, even far below the at that time current price. They are afraid that once the lockup period ends, shorters will bring this stock back down to earth and they would receive less for selling their shares.
How you could still profit
As I’m writing this, the stock is still at $140. Even at this level the valuation doesn’t make sense. The company would have to deliver perfect results for the coming five to ten years to be worth this much money. In a market where there is competitors that are much bigger, have a better distribution network and influence it makes no sense to buy $BYND at these levels for the long term. I won’t even talk about the low entry barrier into the meatless meat market or the fact that these meat substitutes are not much healthier than a regular piece of meat.
Anyhow, if you have enough cash in your investment account, or you’re using margin (collateral from your assets) you can sell one or more short calls on $BYND. Because the stock is so volatile, there is a lot of extra premium in the options. You could also check with your broker at what percentage rate you could borrow $BYND shares to short them. This is however a more tricky situation than selling a simple call.
Don’t forget the stock price already came down from $200+ once before. It managed to rebound based on the big hype. It reached $230 and fell down again, I’m anxious to see what happens when the lockup period expires and 40 million extra shares will be on the market. Shorters will be able to use more shares and lend the shares for less cost than they do now.
DISCLOSURE: I closed one short option position successfully, I’m still short BYND with another option trade.
For any questions regarding options, leave them down below in the comment section or simply hit me up on any of my social media channels!