Why Beyond Meat’s euphoric investors should heed the lessons of Tilray

It’s easy to see why Beyond Meat Inc. investors have been caught up in the hype, according to Renaissance Capital founder Kathleen Smith.

Smith, who runs Renaissance’s IPO ETF, said much of the interest since the company went public at US$25 per share can be attributed to the stock offering investors their first opportunity to invest in meat alternatives on a prominent stock exchange. That interest has resulted in a 500 per cent gain in just two months, including three days in which the shares jumped more than 20 per cent, making it the best performing IPO so far in 2019.

“(It’s trading) like it’s a cure for cancer,” she said on Monday after another massive upswing.

While the shares fell 20 per cent after a JPMorgan downgrade Tuesday — a pullback that was perhaps overdue — the euphoria surrounding the stock has given some a sense of deja vu.

• Beyond Meat is falling after JPMorgan said the stock, up 572% from its market debut, is now too expensive
• Beyond Meat surges 87% in two days
• Beyond Meat’s forecast sends 2019’s IPO darling to new heights

Investors need look no further than Tilray Inc., the B.C.-based cannabis company that IPO’d on the NYSE last July at US$17 and within two months went on an historic 1,664 per cent run that saw its shares touch US$300.

That valuation, investors quickly found out, was unsustainable — by last week, the stock had fallen below US$35. The path Tilray has taken since its quick start should serve as a caution to those who are looking to invest in Beyond Meat, Smith said.

“For the two of them, there’s got to be a word of caution,” Smith said. “At some point, in Beyond Meat, there (will be) other competitors, as with Tilray, that come into the market and then there’s less scarcity value.”

Tilray’s rally ended when that scarcity value disappeared. At first the stock was alluring, given that it offered American institutional investors their first opportunity to buy into cannabis, according to Seaport Global Holdings analyst Brett Hundley. But within months, competitors such as Canopy Growth Corp., and Aurora Cannabis Inc. announced dual-listings in the U.S. as well.

“That enabled investors to take their money elsewhere and that let a little bit of air out of the Tilray balloon,” Hundley said.

Beyond Meat, he said, currently has the same allure to investors. It’s the one option they have to enter the meat alternatives market — one, like cannabis, that shows an enormous potential for growth. In a recent report, Allied Research estimated that the meat alternatives market accounted for US$4.18 billion in 2017 and will reach US$7.55 billion by 2025.

Should multiple competitors enter the fray and IPO, investors who placed their bets on Beyond Meat may re-evaluate whether they prefer another option instead. Impossible Foods, the company that is thought to be Beyond Meat’s main competitor, is believed to now be valued at around US$2 billion after a round of venture capital financing in May.

Where Beyond Meat investors may have further cause for concern is in the stock’s float. Only 19.52 per cent of its shares are currently being traded. The rest are in lock-up. The low supply adds to the scarcity value and has the potential to fuel early gains, but as Tilray investors learned, there can be severe repercussions.

Tilray’s stock was also initially boosted because of a tight float — only 13 per cent was available during its surge — but it has faced downward pressure since January when its 180-day lock-up period expired. Investors were concerned that its largest shareholder, Privateer Holdings, which owns 77 per cent of outstanding shares, could flood the market with shares.

Since January, Tilray’s free float has creeped up to 27 per cent, according to Bloomberg, and the stock is now worth half of what it was then. Those Privateer shares will slowly enter the market over the next two years, Tilray announced Monday, adding further supply to a market where demand is edging lower.

Like Tilray, Beyond Meat has become a popular target for short sellers who are both picking up on its tight float and betting that its rally cannot be sustained. More than 50 per cent of Beyond Meat’s free float is now being shorted, according to analytics firm S3 Partners.

(Beyond Meat is trading) like it's a cure for cancer

Renaissance Capital founder Kathleen Smith

There are some differences between the two companies, however. Hundley points out that cannabis companies are forced to go public to raise capital, diluting the market for Tilray, because they’re selling what’s still an elicit substance in the U.S. Meat alternative companies like Impossible Foods may remain private and simply continue to count on rounds of venture capital financing instead.

More importantly, Smith said, is that Beyond Meat believes it’s on pace to become profitable in only its second earnings report, giving fundamentals-based investors a reason to believe in the stock as well. Tilray is still not profitable and the company said on Monday that it would not be for at least another year.

The answer, amid the uncertainty, is for investors to avoid the temptation of betting too much, too early on these names, Smith said.

“Don’t bet the ranch on one IPO,” she said.

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