Beyond Meat (BYND) is coming back to earth after a key analyst downgrade warns that the meteoric post-IPO rise has left its valuation overdone.
Shares of the Los Angeles-based producer of plant-based food products fell more than 10% in pre-market trading Tuesday, tempering a remarkable rise from a $25 IPO price to a close of nearly $170 on Monday.
The shares had run nearly 70% in just two days following the company's first earnings release raised guidance only slightly, alarming analysts as the valuation climbed to a gawdy 114 times sales.
"At some point, the extraordinary revenue and profit potential embedded in BYND will be priced in," J.P. Morgan analyst Ken Goldman wrote in a note to clients on Tuesday morning. "We think this day has arrived."
He downgraded the stock to a "Neutral" rating as he warned the meteoric rise had simply gotten out of hand.
With a market cap of $10.5 billion, Beyond Meat is now worth more than the market value of Shake Shack, Wendy's, Jack in the Box, Red Robin, Habit Burger, and Good Times ... combined. $BYND pic.twitter.com/27BOi5v6O8— Charlie Bilello (@charliebilello) June 10, 2019
"In other words, this downgrade is purely a valuation call," Goldman said. "With a valuation this elevated, any hiccup in performance - real or perceived - could lead to a meaningful correction in the share price."
While he maintained positivity on the long-term runway for the company built on the back of a substantial addressable market and the opportunity to curry favor with fast food chains like Del Taco (TACO) , Goldman warned that the valuation is simply untenable at this point, especially for an as of yet unprofitable company.
"We believe the company's growth opportunity, strong management, and near-term ability to post financials that exceed Street expectations are balanced by a valuation higher than what we are comfortable with," he concluded.
Goldman set a price target of "just" $121 per share, suggesting significant downside from Monday's close. The Wall street consensus is only substantially lower, per FactSet estimates, at a price target of $103.71 per share. The consensus rating stands at a "Hold" rating following the J.P. Morgan downgrade.
The precipitous fall in share price may provide a modicum of relief to short-sellers that have been squeezed by the stock's remarkable run post-IPO.
"Beyond Meat has hit the short-squeeze trifecta, with several hundred thousand shares of recalls hitting the street; stock borrow rates solidly in the triple digits and its stock price rallying 69% in just two days," Ihor Dusaniwsky, managing director at S3, wrote in a report on Monday. "If shorts don't begin covering their positions soon, we can assume that BYND is becoming Tesla-esque (TSLA) where being a long shareholder is more than an investing decision but also a lifestyle decision, while being a short-seller is a more of a test of conviction and principle rather than just short-term gains."
$BYND short interest is $814 million; 5.87 million shares shorted; 51.44% of float; 134.11% stock borrow fee on existing shorts and 450% to 700% fee on slivers of stock borrows this morning.Shorts were down $229 million in mark-to-market losses on Friday, they are down $398mm YTD pic.twitter.com/rDM6EkjXDA— Ihor Dusaniwsky (@ihors3) June 10, 2019
After J.P. Morgan's downgrade on Tuesday morning, shorts may have avoided this Armageddon-type situation, even before its much-anticipated competitor Impossible Foods hits public markets. With no institutional bedrock to buoy shares, the price action on Tuesday could be a wild ride.