Shareholders of Beyond Meat would probably like to forget the past six months even happened. The stock dropped 62.9% and now trades at $1.04. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy Beyond Meat, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Do We Think Beyond Meat Will Underperform?

Even with the cheaper entry price, we're cautious about Beyond Meat. Here are three reasons why BYND doesn't excite us and a stock we'd rather own.

1. Demand Slipping as Sales Volumes Decline

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

Beyond Meat’s average quarterly sales volumes have shrunk by 10.8% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable.

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Beyond Meat’s margin dropped by 16.7 percentage points over the last year. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business. Beyond Meat’s free cash flow margin for the trailing 12 months was negative 49.2%.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Beyond Meat burned through $142.9 million of cash over the last year, and its $1.32 billion of debt exceeds the $118.5 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Beyond Meat’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Beyond Meat until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

Beyond Meat doesn’t pass our quality test. After the recent drawdown, the stock trades at $1.04 per share (or a forward price-to-sales ratio of 0.3×). The market typically values companies like Beyond Meat based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. Let us point you toward the most entrenched endpoint security platform on the market.

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