MACRO BETS AND MICRO REALITIES: BEYOND MEAT’S POST-IPO RUN!

Aswath Damodaran

2

In a year of tech IPOs, the biggest winner is..

3

The Company

¨ The company, headquartered in Southern California (El Segundo, a seaside community that is part of greater Los Angeles) and founded in 2009, makes makes pea-protein based products that mimic burgers, ground meat and other meat products in taste, texture and aroma.

¨ In the prospectus that it filed leading up to its IPO, the company argues that its production process is revolutionary and new, and is responsible for its capacity to replicate animal-based meats.

4

The Competition

¨ The Competitor: It’s most immediate competitor is Impossible Foods, another young start-up producing its own plant-based versions of burgers and meat-like products.

¨ Fast Food Allies: Both companies have also adopted similar strategies of enlisting fast-food companies as product adopters, with Impossible Foods showing up on Burger King (Impossible Whopper) and White Castle menus, and Beyond Meat countering with TGI Friday's, Carl's Jr. and Red Robin.

¨ Waiting in the wings: Other companies are taking note, including not long standing producer of organic and vegan offerings, but also companies like Tyson Foods and Perdue that derive the bulk of their revenues from meat, but see opportunity in this new market.

5

The Drivers of the Meatless Meat Market

¨ Health: While the research on the health consequences of eating meat continues, it has become part of conventional wisdom that meat (and red meat in particular) is associated with a greater risk of cardiovascular disease and cancer.

¨ Environment: As climate change and environmental concerns rise to the top of concerns for some, there are some who have shifted away from meat, in general, and beef, in particular, because of its environmental footprint.

¨ Taste: As companies like Beyond Meat and Impossible Foods are showing, plant-based alternatives are getting better at mimicking real meat.

6

Market Sizing: Big Picture Perspective

¨ The meatless meat market is still small, relative to the overall meat market: In 2018, the meatless meat market had sales of $1-$5 billion, depending on how broadly you define meatless markets and the geographies that you look at. It is small relative to the overall meat market that is in excess of $250 billion, just looking at the US, and closer to a trillion, if you expand it globally.

¨ It is still a niche market: It has deepest inroads in urban, female and affluent populations and its allure is greatest with former meat-eaters rather than lifelong vegetarians, who don't crave either the taste or texture of meat.

7

Looking to the future

¨ The big question that we face is in estimating how much the shift towards vegan and vegetarian diets will continue, driven by health reasons or environmental concern (or guilt). There is also a question of whether some governments may accelerate the shift away from meat-based diets, with policies and subsidies.

¨ Forecast divergence: Given this uncertainty, it is not surprising that the forecasts for the size of the meatless meat market vary widely across forecasters, from a low $5 billion in 2023 at the low end to $10 billion at the other end.

¨ A Biased Estimate? Beyond Meat, in its prospectus, uses the reach of non-dairy milk(soy, flax, almond mild) in the milk market to estimate the market for meatless meat to be $35 billion in the long term.

8

Beyond Meat: Current Numbers

¨ Small revenues, big losses: At the time of its public offering, Beyond Meat had all of the characteristics of a young company, not much separated from its start up days, with revenues of $87.9 millions, operating losses of $26.5 million and a common equity of -$121.8 million.

¨ The first report: Its first earnings report, delivered to a rapturous market response, reported a tripling of revenues and a narrowing of operating losses, but even with it incorporated, the company remains a small, money losing company.

9

Beyond Meat: My story

¨ Total market for meatless meats will grow significantly: I see the total market for meatless meats growing from $1 billion in 2018 to $12 billion by 2028.

¨ With Beyond Meat capturing a significant market share: I see Beyond Meats capturing a 25% market share of this market, building on its early entry into the market and brand name recognition (from its fast food connections).

¨ While delivering operating profits similar to the large US food processing companies: I see pre-tax operating margins improving towards the 13.22% that US food processing business delivered in 2018, built largely on economies of scale and pricing power.

¨ While reinvesting a lot less, in delivering that growth: I will assume that it will be able to use technology as its ally to invest more efficiently in the future, generating $3 in revenue for every dollar in invested capital, about double what the typical US food processing company is able to generate.

11

What if?

Beyond Meat’s Value per share

At the price $127 that Beyond Meat was trading at on June 11, 2019, the shaded cells represent break even points.

12

A Macro Bet

¨ The Meatless Meat Market Estimate: The value that you obtain for Beyond Meat is determined mostly by how large you believe that market for meatless meats will end up being.

¨ A pure macro bet? In fact, there are some investors whose primary reason for investing in Beyond Meat is as a bet on a macro trend on vegan and vegetarian diets.

¨ A pure play?Adding to this phenomenon is the fact that Beyond Meats, as one of the first companies in this group to go public, is one of the only pure plays on this macro bet.

13

The Added Components

¨ Reality Checks: Investors don't get pay offs from making the right macro bets, but from the investment vehicles that they use as proxies. To get the pay off from a correct macro call, there are two additional assessments (over and above the macro trend bet) that investors have to make:¤ Industry structure: A growing market may not translate into high value businesses,

if it is crowded (with lots of players) and intensely competitive. In contrast, a growing market where there are significant barriers to entry and a few big winners can result in high-value companies with large market share and unscalable moats.

¤ Pick winners early: Investors have to pick the companies that are most likely to win in that market. That is difficult to do, when you are looking at young companies in a young market, but there is no way around making that judgment.

¨ The Big Market Delusion: In a post from 2015, I argued that in big (or potentially big) markets, you can expect companies to be collectively over valued early in the game.

14

My Beyond Meat Bets

¨ I have implicitly made assumptions about both these components, by first allowing operating margins to converge on those of large food processing companies and then making Beyond Meat one of the winners in this market, by giving it a 25% market share. ¤ I believe that the meatless meat market will evolve like the broader

food business, with a few big players dominating, with similar competitive advantages including brand name, economies of scale and access to distribution systems.

¤ I also believe that Beyond Meat and Impossible Foods, as front runners in this market, will use their access to capital to scale up quickly. Their use of fast food chains feeds into this strategy, with bulk sales increasing revenues quickly, allowing for economies of scale, and offerings helping improve brand name recognition.

15

A Trading Play?

16

The Bottom Line

¨ For a young company like Beyond Meat, making the transition from start-up to young growth, it is all pricing all the time, with stories about market size driving the pricing.

¨ This trading phenomenon is exacerbated by the fact that it is one of the few pure plays on a macro trend, i.e., a shift in diets away from meat to plant-based options.

¨ That leads me to two conclusions:¤ You will see wide swings in the stock price on a day to day basis, for

little or no reason. ¤ The second is that selling short on a stock like this one (small, with a

small float) is a dangerous game, since you are unlikely to have time as your ally, and while you may be right in the long term, you may bankrupt yourself before you are vindicated.