Something that really seems to be lacking these days in business is integrity. Everyone seems to be out chasing the short term gain and satisfaction. Eventually this attitude always costs those who pursue it. Sure, it may seem like you are winning in the short term, but in the long term it's usually a mistake. Recently, we wrote an article on the incredible Beyond Meat stock rise. We tried to be fair in giving the stock a price target of $100/share. But, then the plant-based meat company announced that they will be offering 250,000 new shares and that existing shareholders will be selling 3 million. Some of Beyond Meat's biggest shareholders are selling, including venture capital firms Obvious Ventures and Kleiner Perkins Caufield & Byers. The two plan to sell parts of their stake, selling almost 705,000 of Kleiner's 7.75 million shares and over 405,000 of Obvious' 4.46 million respectively, if both firms exercise their rights. Kleiner's stake was worth about $194 million at the BYND IPO and is now worth around a colossal $1.5 billion! How is this possible when the lockup expires Oct. 29th you ask? Underwriters like Goldman Sachs and J.P. Morgan allowed them to waive it in order to take advantage of the overblown stock rise. Clearly CEO Ethan Brown and CFO Mark Nelson looked to capitalize on the outrageous stock move at the cost of many traders, investors, and even their own employees. In business there is something called ETHICS. Investors should have learned a hard lesson after the Elon Musk $420 buyout tweet situation. Never marry a stock and certainly do not form a "bromance" with the Founder/CEO of a company. Being so caught up in a personality and the hype surrounding them can blind you from reality. It cost many investors dearly who owned stock in Tesla. Moreover, certain stock related moves will make people question a brands integrity and can cause lasting damage. Hurting people that support you is a dangerous thing. BYND has only been trading for a few months and they could have already done irreparable damage! Wall Street related media has been pumping this damn thing to no end since the IPO opened for trading. Sadly, Jim Cramer recently spun the Ethan Brown/Beyond Meat situation positively as if the recent shifty moves were a plus for investors. Killing the stock price is not exactly a good thing and should be a big warning sign. Jim may or may not have been trying to help his old pals over at Goldman Sachs, who happen to be underwriters on the deal. And what is with these ridiculous so called "analysts" raising price targets when they know damn well the stock price is beyond ridiculous even after the recent fire sale? Reminds me of the credit rating agencies that were inflating credit ratings of sub-prime mortgages leading up to the financial crisis. Seems like these jokers need to get into another line of work. It's becoming a real embarrassment!
In light of the shocking recent discounted public offering, there is now cause to question whether or not this entire fiasco could possibly have been orchestrated to squeeze shorts and run up the stock price for the secondary/follow-on offering. Sadly, this is not uncommon. This was most likely not just "dumb money" chasing as many claimed in the media, but was probably much more organized. People throw around the term "short squeeze" pretty loosely, but often do not understand it. Short squeezes don't just happen. Someone has to do the squeezing by creating pressure and in my opinion this might have been a professional job. It could be market makers, big money retail traders, combined dumb money chasers, underwriters themselves, or even a combination. Sometimes companies themselves will put out PR's claiming they cannot even explain suspicious price action in their own stock, although more often than not, they probably do know. Often times there is some larger player using algo programs to create the upward move and force the shorts to buy to cover and low float stocks with high short interest are always a big target. We noticed on level 2, a lot of automated tiny trades that seemed to be used just to keep pressure on shorts. A stocks price technically just represents the last price it traded for. So, whether someone buys 10 or 10,000 shares of BYND stock at $150, that is considered the current price (number of shares doesn't matter). So, it would make sense to use the smallest number of shares possible to push the stock price up (it's much cheaper and has the same effect). If a big fish had a large stake, it would be highly lucrative to trickle it up with light buys to increase the value of the holdings and cost of doing so would be minimal. The more it is done on a daily basis, the higher the stakes value becomes. As the price rises, some of the shares are unloaded and the process is repeated. Often times, this is why you will see a float turnover several times in a day. Whales can start dumping the fresh shares they bought at the beginning of the day and then buy them back. All the while, the overall value of the initial IPO investment gets higher and higher and they are banking on the trading as well. It's really quite a game and possible it may have been taking place with BYND. Potential culprits could be those that stand to benefit the most - the underwriters or early large investors. In our opinion, waiving lockups is dirty pool and should be an illegal practice. There is no point in having a lockup period if underwriters are just going to waive it as soon execs or investors decide to take advantage of a large price rise (whether expected or unexpected). The sneakiness sets a precedent that will be followed by others. Due to what we feel are unethical business practices by greedy BYND insiders, we are dropping our price target from $100 to $65. It's pretty clear the stock has been far too over-hyped by Wall Street and we will continue to attack with shorts/puts on any push the controllers create.
It's pretty obvious Beyond Meat has been putting out more press releases than Elon Musk has been given government grants. Company CEO's are now more like technical traders and Elon has set the tone. As long as CEO's are compensated mostly for stock performance this remains an issue. Always keep in mind, the most important aspect of an investing decision is competent management. And that management must take the long term view. They need to stop attempting to pump their stock and focus on building the business, ethical management, taking care of employees, and growing the business through creative and useful products as opposed to focusing on profiting from short term price moves. This can and will end up in long term disaster - hence the Tesla situation.
Another interesting consideration is whether or not some of these players took a short position ahead of the offering. It is about time the SEC require large short positions to be reported for market transparency. Traders and investors deserve to know when a whale is taking on a large short. These non-transparent shadow moves are getting out of control and with the use of tools such as dark pools, Wall Street is becoming LESS transparent, not more! When a company pulls a suspect action, they should be punished via selling/shorting and by refusal to buy their product or service. This is always the best way to get their attention. After these Elon Musk like moves, we might even have to start using the ticker "BYNDQ" going forward.
In terms of earnings, revenues jumped nicely about 290% (expected with recent partnerships), but gross margin widened to 34% from 15% a year ago. However, this hardly justifies a valuation over $10 billion. It does appear bigger fish are now taking the stock down with controlled selling, but want to avoid spooking bulls too much. Many are still waiting for the Oct. 29th lockup expire to begin selling. As these shares get unloaded, nasty squeezes are being created every now and then to scare shorts and keep them honest. Again, this entire situation could be much more designed than anyone would believe. Unfortunately, there is just no way to know all of the details, unless you are someone who is a part of it.
The message to companies like Beyond Meat is basically to have some damn integrity. Don't make moves that hurt others and damage your brand right out of the gate. Slipping in a sneaky public offering at a very discounted price through way of waived lockup is pure nastiness and could be costly in the long run. In our opinion, this company is now up there with the Riot Blockchains of the world. Short research groups are going to be on them like white on rice and it's well deserved! Ethan Brown and Mark Nelson know damn well that BYND stock will probably never be close to recent prices again and they wanted to capitalize. Insiders probably would have dumped a lot more shares if it wouldn't have looked like outright robbery. They knew the move would crush many traders and investors alike. Sure, initial investors who bought in on the IPO are still well in the green, but many supporters came in later and took beatings when the stock quickly tanked on offering news. We did our best to alert traders/investors on social media and in our initial Beyond Meat article that this could be a stairs up, elevator down scenario. In the last 12 months, secondary offerings came in at a 6% discount on average. The BYND offering price (which was finally released during this writing) is $160 per share, representing a very steep discount of almost 30% from where the price was ($220 area) when the offering was announced with earnings. The stock price is dropping after hours and hit lows of about $183 (still highly overvalued and can head much lower). Another questionable move was the offering price being delayed a few days, probably to buy more time for large sellers before people realized how steep the discount actually was. A New SEC rule should be implemented requiring public companies to release the exact offering price when first announcing. These tactics are clearly meant to deceive and we should not stand for it! Our advice to newer businesses (public or private) is to stop focusing on the short term temptation and focus on the long term game plan. You will end up winning as far too many fail by concentrating on the short road to instant gratification! Whether a startup, mid sized company, or large corporation, there are numerous examples of those that took the short term path and ended up going to $0!
Netflix stock recently took punishment dropping over 10% on earnings before finding support in the $320 range. Like millions of others we have enjoyed watching movies, television shows, and documentaries on the streaming platform. Personally, I love to watch financial, business, and Wall Street related documentaries and it's the main reason I use the service, but am finding myself gravitate more to other platforms like Amazon Prime. Analysts and talking heads that claim the company has no competition are either crazy or "long and lying." Prime, Hulu, Sony Crackle, Tubi, Roku, Youtube, HBO, Showtime, Starz, and Disney are just a few examples and many more are coming in hot and fast. Hollywood is after them and important content is being pulled such as Friends, The Office, and Disney's movies (especially Marvel). Sometimes the innovator can end up getting the short end of the stick once smart and powerful competition finally shows its face. Bringing in top acting talent and keeping up key quality/original content is going to make all the difference down the road. They need to keep shows such as Narcos (one of my favorites) coming in on the regular...
Product: Don't get us wrong as we do think Netflix is a great service, but it's the stock price that lacks greatness in terms of long opportunity at these extreme price levels. My main issue is the increasing number of "B" movies and wasteful baloney that will never be watched and seems to be used as a content filler to make it appear as if there are more options. A lot of time is wasted searching for something and finding nothing. Content is always king and new fresh options are of max importance. I've noticed the same film options sit on the platform for what seems forever. Many A-list actors have been involved with what feels like "B" Netflix content. A major plus is the fact that commercials are not utilized (others like Sony Crackle bombard you). Nobody wants to deal with long drawn-out ads any more. People may be willing to put up with a few, but the days of ads dominating 50% of a film or show are on the verge of dying. In 2021 Netflix will lose popular show The Office and Disney is pulling their content at the end of 2019 for their own streaming service.
Valuation: Netflix has a current valuation of around $145 Billion (as of this writing) after the recent earnings drop on 7-17-19. The company reported earnings per share of 60 cents, past the Zack's Consensus Estimate by 4 cents but declining from year-ago earnings of 85 cents. Revenues jumped 26% year-over-year to $4.92 billion, which was in line with the Zack's consensus estimate. Netflix added just 2.7 million new subscribers globally in the 2nd quarter, missing the company’s own guidance of 5 million subscriber growth. It lost 126,000 subscribers in the United States versus the company’s 0.3 million expectation, but added 2.8 million internationally, down from the projected 4.7 million. Subscriber growth is a major concern as it could be a sign that competition may be eating at the company. We believe the stock price is extremely high at current levels and clearly this is due in part to the rise of the broader market.
Bottom Line: When buying a stock you always want to be ahead of the game, not behind it. You want to be in before the move, not chasing when its peaking out, the market is in a bubble, and the stock price is clearly overvalued. Keep in mind that you can always enter again when the price is cheaper if you feel it has potential to get higher. Our target price on the stock in the short to midterm is $250 per share. On any intraday push we will be looking to attack with short sells or puts. The short interest is fairly low at 4%, so not as squeezable as something like Tesla, which is 30%. If the Federal Reserve does end up cutting rates it is possible NFLX could get climb some with the market, but we do feel its likely that previous highs of $400 represent a potential top and may not be seen again. If you're an investor who has benefited from the amazing 10+ year run, it's time to think about taking profits. Bull runs cannot go on forever despite how strong it may currently feel and the economy is showing signs of weakness. When confidence is unreasonably high, bad things can and will happen. In fact, market shocks tend to come during times like these. Moreover, the market is being dangerously propped up and held by the so called "Fed Put." Netflix has certainly benefited from this Fed/politically controlled market, but rest assured that when it does end, NFLX will be dragged down just like the rest.