Where’s the beef?
Beyond Meat — a company that sells imitation meat products — got whacked with a 12% loss. That still left it nearly 10 times above its initial offer price.
The remarkable thing about Beyond Meat is not the fake meat; health nuts, animal lovers, and Seventh-day Adventists have been eating mock meat for decades. The interesting thing is what the company reveals about the whole fandango.
Profits to strangers
A few decades ago, we had the idea that maybe we would like to take our company public. So we called a friend — a partner at Alex Brown, Baltimore’s premier investment firm — to find out more.
‘Forget it,’ was this old-timer’s advice.
‘In the first place, no reputable investment banker will take it on. You’re too small. And you’ve got to prove that you can grow and remain profitable. But if you can do that…Why go public? Why give the profits to strangers? You just give yourself extra headaches.
‘People only go public if they need the money…or they think the business has topped out. Then, they’re selling to the dumb money. I mean, think about it. Who’s going to sell his business now if he thinks it will be more valuable in the future? Only a fool or a charlatan.’
We thought for a minute about which category we should aim for. But we soon rejected the whole idea.
Job well done
The traditional way to make a lot of money is to start a company, work for years to prove out your concept, and then take it public. You sweat to get through the ‘growth’ stage of the business. Then, you get your reward and leave the public with the mature, less profitable, but more predictable, stage.
Beyond Meat’s entrepreneurs could have spent the next 10 years mixing in a little more sunflower oil…squeezing out the last of the gluten…adding some soy extract. Eventually, they’d probably be able to produce a fair facsimile of a hamburger.
Then, they could battle it out with other fake-meat producers for market share. If they were lucky, they might have gotten sales up to $200 million or $300 million, with profits of, say, $30 million a year.
At least investors would know what they were getting. They could take the growth rate and the profit margins, extrapolate into the future, discount the expected profit stream, and come up with a reasonable idea of what the company was worth.
On the numbers I gave here, we might expect Beyond Meat to go public for, say, 10 times earnings, giving it a market capitalisation in the neighbourhood of $300 million.
Wouldn’t that be enough? ‘Job well done,’ the investors might say. CEO Ethan Brown could feel like a success…instead of a shyster.
But Brown and his team didn’t wait. With less than $10 million in sales…only 381 employees…and zero profits — ever — they offered the company to public investors.
Did the investment pros turn them away…as Alex Brown turned us away 30 years ago? Nope…
Did investors laugh and turn up their noses? How was the company ever going to be profitable? How was it going to compete with food-industry giants, such as Hormel and Tyson Foods?
Everybody knew that Beyond Meat had no proprietary formula…no popular brand; there were no castles in this market and no moats to protect them.
It didn’t seem to matter. The stock is still up 200% since the May IPO.
Fools and money
These are strange times…with strange portents in the night sky. Nothing is quite what it appears to be.
No ground is solid enough to stand on. No number can be trusted. And all the old, time-tested traditions — from balanced budgets, to IPOs, to honest prices — have been swept away by dishonest money.
The purpose of real money is to coordinate, calibrate, and commemorate who owes what to whom. It is vital information for a modern, post-Paleolithic economy. Take it away and everything goes a little flooey.
Traditionally, fools and their dumb money are soon parted. That imposes a limit on how many dumb deals the market can absorb; there’s only so much retarded cash available.
But in May, when Beyond Meat went public, the Federal Reserve reversed its ‘tightening’ policy, beginning a loosening cycle.
Get in now, said the promoters, or risk missing out on one of the most major changes in consumer eating habits in 100 years! FOMO! (Fear of missing out.) This was ‘better than bitcoin,’ said the hustlers.
And so it was that the IPO came out…and instead of laughing, investors bid up the price to nine times the initial offer. The market cap rose over $14 billion. That made it bigger than 29% of the S&P 500. And made it worth more than Conagra Brands, a 100-year-old food giant.
And now, CEO Brown and the other founders say they’re getting out when the getting’s good — as soon as they can. The CEO alone plans to sell some $8.7 million in stock.
Conagra has everything that Beyond Meat lacks — employees (18,000 of them), brands (owns Duncan Hines, Birds Eye, Orville Redenbacher, Hunt’s, and Slim Jim), sales ($9.5 billion), and profits ($708 million).
There’s the beef. A real business. With real sales and profits. But the weight of it only keeps Conagra’s feet on the ground. Conagra plods along while Beyond Meat soars. What to make of it?
We don’t know. But it is fakeness that speculators want now.
And for the moment, there seems to be no end to their dumb money…and no limit on how dumb it can get.
Regards,
Bill Bonner