3 Reasons to Sell Beyond Meat Stock Before It's Too Late

Long-term investing generally is the best way to earn life-changing returns in the stock market. But unfortunately, some stocks tend to remain duds, no matter how long you wait for a turnaround. With shares down by around 99% from their initial public offering (IPO) in 2019, Beyond Meat (NASDAQ: BYND) certainly falls into that category.

And while the equity might look like a good deal at just $0.76 per share at time of writing (down from an all-time high of $234.90), investors shouldn't take the bait. Let's discuss three reasons Beyond Meat's stock could fall even further.

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1. Operations are in a tailspin

Public stocks exist to generate earnings for their shareholders. And even the most hyped-up companies can become irrelevant if investors lose faith in their ability to create a pathway to profitability. Beyond Meat's third-quarter earnings show that things are moving in the wrong direction.

Revenue fell 13.3% year over year to $70.2 million, driven mainly by weakness across all its sales channels and an exit from the Chinese market because of low customer demand. But Beyond Meat's U.S. business isn't faring much better with domestic food service (where it sells to restaurants) declining by an eye-popping 27.3% in the period. Meanwhile, operating losses ballooned from $30.9 million to $112.3 million.

Beyond Meat's top-line deterioration is a red flag because the company has historically been seen as a growth stock that will need to scale its way into profits. This clearly isn't going to happen any time soon. And the scale of its operating losses suggests bankruptcy could eventually be on the table, although management has flatly dismissed these rumors.

2. Plant-based meat was arguably a fad

Beyond Meat's core problem is that it is selling a product that consumers simply aren't very excited about these days. Half a decade ago, plant-based proteins were trending because of their potential health benefits and concerns about protecting the environment -- beef production alone is estimated to contribute to 15% of global greenhouse emissions. And simulated meat can reduce emissions by as much as 77%.

However, this turned out to be a fad instead of a lasting shift in consumer tastes. Beyond Meat's early restaurant partners, like McDonald's, quickly dropped its offerings in most markets as retail sales stalled.

It turns out that while customers were curious enough to try plant-based meats, they weren't impressed enough to make these products part of their daily lives. The Washington Post suggests the problem may have something to do with a perceived lack of authenticity compared to real meat. But a simpler explanation could be that consumers simply don't think the products taste very good. And that's a tough problem to fix.

3. The new branding is too little too late

Beyond Meat isn't taking these challenges lying down. On the operational side, management is pursuing aggressive layoffs and cost-cutting measures to try to bring cash burn under control. And more importantly, they are trying to win back consumers by reworking their brand identity.

This month, the company changed its name from "Beyond Meat" to "Beyond" as it expands its product lineup from plant-based meats to include protein drinks. If the pivot works, it could give the company much-needed diversification into a market expected to expand at a compound annual growth rate (CAGR) of 9.4% to $76.56 billion by 2032.

That said, Beyond Meat's rebrand can be taken as a tacit admission that the substitute meat market no longer has attractive long-term prospects. Investors can expect the company's core business to continue suffering from negative growth and huge losses. The company could also face significant competition in the protein drink market from established rivals, like Muscle Milk and OWYN -- the latter of which already targets the vegan market.

While Beyond Meat might look remarkably cheap at just $0.76 per share, there is still room for more downside.

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.