Where Will Beyond Meat Stock Be in 3 Years?

"Dead cat bounce" is a rather morbid investing term to describe a phenomenon when a failing stock posts a sharp but short-lived rebound before resuming its downward trajectory. Beyond Meat (NASDAQ: BYND) is an excellent example of this phenomenon. The plant-based protein provider shocked the market in mid-October when it jumped by over 1,000% in just four days before quickly giving back most of its gains because of a lack of fundamental support for the upward move.

That said, with a market cap of just $724 million, Beyond Meat's equity has become extremely cheap -- especially relative to its peak valuation of just over $14 billion shortly after its IPO in 2019. Is the discount a sign to buy or stay far away? Let's dig deeper into the pros and cons of Beyond Meat to determine what the next three years might have in store.

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Another meme stock?

The rise of Robinhood and other commission-free trading apps has made retail investing more accessible and popular than ever. Combined with social media platforms like Reddit, this trend has given rise to "meme stocks" -- shares of companies that surge in popularity despite having questionable fundamentals. Second-quarter earnings show that Beyond Meat's operational situation remains as bad as it's ever been.

Second quarter sales dropped almost 20% year over year to $75 million, driven in large part by weakness in the U.S. retail segment (where it sells its products via grocery store distribution channels). The company also exited underperforming markets like China, where it failed to establish a foothold amid high operational costs and stiff competition.

It's hard to build a strong brand around a product that consumers simply don't want. Beyond Meat can't even blame its failure on a lack of public awareness because plant-based proteins were all the rage a few years ago -- even appearing at mainstream restaurants like Burger King and TGI Fridays, which once offered its Beyond Burger nationwide. People who wanted to try the product have already done so and decided not to come back. That's an operational problem with no clear solution.

What about the balance sheet?

Beyond Meat lost $34.9 million through its operations in the second quarter alone -- an amount that would translate to an annualized loss of nearly $140 million if the trend continues. With only $103.5 million in cash and equivalents on its balance sheet and a whopping $1.14 billion in long-term debt, the company appears to be barely staying afloat, with little indication that it can generate sustainable value for shareholders.

Management took advantage of the recent stock rally to execute a significant debt restructuring. Under the agreement, debt holders agreed to cancel approximately $800 million in long-term debt in exchange for $208.7 million in convertible notes and 316 million newly issued shares.

Prior to the transaction, Beyond Meat had about 76.65 million shares outstanding, meaning this deal will increase the total share count by more than 400%, resulting in massive dilution for existing shareholders.

On the bright side, Beyond Meat's debt restructuring deal makes bankruptcy significantly less likely and buys more time for the company to execute a turnaround (if that is even possible). But it also highlights one of the biggest risks of investing in unprofitable meme stocks. When a company can't sustain its operations, management will naturally see the elevated stock price as an opportunity to raise cash or pay off debt.

Where Will Beyond Meat stock be in three years?

Over the next few years, Beyond Meat will probably continue trying to cut costs by laying off staff and exiting unprofitable markets. There is a real possibility that it could eventually transform itself into a smaller-scale boutique company that prioritizes sustainable profits over growth. That said, this transition will involve more downsizing. And there is no guarantee it will even work. Investors should sell or avoid the stock.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Beyond Meat. The Motley Fool has a disclosure policy.