Big Things Brewing
We have not even been through a third of the year, and what may turn out to become the biggest FoodTech event of 2021 has already started making waves. In the first week of January, rumors started circulating that Oatly, one of the hottest global names within the food and beverages sector, might go public during the course of the year. As for why this is a big deal, several factors are at play. Most obviously, Oatly has been immensely successful during the last couple of years, with expected sales of more than $400 million in 2020 and possibility of breaking even in 2021. Second, the company has already gained the public’s favor and amassed a large following (the ‘oat cult’) comprised not only of millennials but also of beloved celebrities like Oprah and Natalie Portman. Third, the IPO market is nothing short of red hot, with 2020 seeing the highest listing activity in a decade, with significant growth in both deal volume and valuations. Ultra-high profile listings of the last year include not only food delivery service DoorDash, but familiar tech names like Airbnb and Palantir as well. Expectations that this trend will continue in 2021 is very likely to boost excitement for upcoming IPOs of next-generation companies like Oatly.
Obviously, a strong case is to be made for successful IPOs of innovative food brands like Oatly, and it seems as though the market has not yet quenched its appetite for FoodTech IPOs. The market will definitely remember public listing success stories from recent years, including those of Beyond Meat (which turned out to be one of the best-performing listings in many years), Delivery Hero, Hello Fresh, and GrubHub. But have all these past success stories, and the massive hype building around future prospects, become possible only through the factors described above? Could the same arguments not be applied to any budding breakthrough technology IPO? What other factors could possibly be at play that are driving the current massive interest in making FoodTech investments accessible to the public?
In this installment of What Lies Beyond, we turn our attention to the global stock markets and the role that companies within the food and beverage industries play within them.
A Brief History of Publicly Listed Food
Food and beverage companies have had their place in the portfolios of sophisticated investors for ages. Legendary names like Warren Buffett and Charlie Munger of Berkshire Hathaway have bet big on food for several decades, with investments in firms like Mondelez and International Dairy Queen. Odds are that even your great-grandparents would have been able to own shares in companies like, or predecessors of, The Coca-Cola Company, Kraft Heinz, General Mills, Heineken, Unilever and Kellogg’s. In part, the popularity of food industry stocks can be explained by factors like familiarity and acquaintanceship. Among the many typical mantras for aspiring investors, few are as commonly cited as “Invest in what you know”, and the valuations of public food industry firms have certainly benefited from adoption of this advice. Most people ‘get’ what businesses in this space are doing since every human being on the planet has a close relationship with food, which cannot be said for SaaS platforms, decarbonization technologies, commodity chemicals or blockchain solutions.
More importantly, allocating part of your investment portfolio to food stocks has historically been a good decision due to the inherent stability and predictability of the industry as a whole. It exhibits clear characteristics of what is known as a countercyclical industry among investors, e.g. one that tends to do well despite general downturns in the business cycle. No matter the strength or weakness of the greater economy, people always need to eat. To illustrate this point, we do not have to look further back in time than a year. At the height of the first serious wave of the COVID-19 pandemic, the S&P 500 index had lost more than 17% of its market capitalization from 2 years prior. By contrast, the Food & Staples Retailing, Beverages, and Food Products industries had lost an average of less than 6%, and the retail sector in specific had gained as much as the broader market had lost.
This inherent stability and predictability of the food sector has made it highly suitable for the application of traditional valuation approaches such as the Discounted Cash Flow (DCF) method. To make a blatant oversimplification, the DCF method aims to estimate the fair value of a company by expressing its projected future cash flows in terms of money today. Unfortunately, to accurately project the future cash flows of a firm is incredibly difficult unless you have a crystal ball on hand. This is especially the case when the operations of the firm are sensitive to uncontrollable external factors such as the state of the economy, indecisive regulators or disgruntled tweets from global leaders. Thankfully, the food industry is largely spared from the impact of such events. Again, people always need to eat. And they will probably eat roughly the same amounts they have consumed at least during the past few decades. For this reason, the future cash flows of a food business are arguably more predictable than those of many others. Therefore, you also rarely see the type of strongly surging valuations and rocket-powered stock market journeys that certain other industries tend to exhibit.
To conclude this little historical exploration, it’s safe to say that food businesses have been the Chewbacca’s and the Alfred Pennyworth’s of the investing world. They might not have piloted the Millennium Falcon or the Batmobile, but have made damned sure that things keep running smoothly in the background. You may not be able to expect the most surprising deeds from them, but it is likely that any predictions you make about their behavior based on previous experience will be turn out to be true. An important role to play, for sure, but is it really the most exciting one? Dare we say that traditional food businesses in the world of publicly listed stocks have been a little… boring? Why shouldn’t food, the most essential industry for human flourishing, be at the center of attention of virtually every Wall Street Journal headline, every financial markets conference, every online investing forum? Odds are that this will be precisely the case in the future.
The Changing Nature of Food
To explore the future role of food on the public stock markets, we begin by looking at an entirely different industry – automotive. In the last two years, the share price of Tesla has climbed by more than 1,000%, reaching a market capitalization that is now greater than that of the top global car producers combined. In relation to the number of cars sold, Tesla’s valuation is about 70 times higher than that of Toyota, the world’s second most valuable automotive manufacturer. In this article, we will not attempt to justify or discredit this valuation, but rather simply ask – how can this be? Any DCF model would certainly value Tesla at a significantly lower level than its peers. What is then the rationale behind putting such a price tag on it, when it is grossly underselling all its competitors? Surely the whole explanation cannot be found in the undying charisma of the Technoking himself?
The most straightforward answer is that investors are not applying the same methods for evaluating Tesla’s business as for GM or Volkswagen. When you think about it, why should they? Does Tesla’s identity begin and end with car manufacturing, or is it something else entirely? A future giant within software? A global leader within production, distribution and storage of electrical power? Perhaps the greatest auto insurance company on earth? All of the above? One factor however stands out among all others – Tesla is positioning itself as a key technology provider within many hyper-growth solutions such as electrification, autonomous driving, connectivity, renewable energy, and more. In effect, Tesla has challenged the view of the very nature of the industry it operates in, and is evaluated not on its capacity to sell cars but rather its expected role as a technological powerhouse in many future-proofed industries.
With the advent of disruptive food technologies like industrial fermentation, food 3D printing, autonomous farming, cellular agriculture and microbial bioinformatics, the food industry is ripe for the same type of transformation that Tesla is now bringing to the automotive industry. The efficiency, precision, robustness and diversity of application in future food technologies will be unlike anything we have ever seen in the industry, and it will no longer make sense to view its companies as simple factories that transform raw materials into food commodities. Each of the aforementioned technologies is not limited to one single value segment or business model, but can be applied within many parts of the food chain. In addition, they could potentially be spun out to completely different fields of activity, such as to pharmaceuticals, medical devices, biomaterials, process engineering and renewable energy. For the next generation of publicly listed food companies, this will mean:
- Stronger profiling towards technology- and IP-based business models such as patent licensing, joint venturing, co-branding and IP sales
- Continuously expanding customer base and total addressable market due to applicability of core technologies in multiple industries
- Multiplication of the number of potential business opportunities, coupled with corresponding increases in uncertainty and risk
Hardly sounds like hallmarks of the food companies we have known for ages, does it?
What Lies Beyond Publicly Listed Food Companies?
As a result of this inherent shift in the way food businesses operate, investors will also be forced to evaluate the FoodTech space in inherently new ways. Due to the many factors described above, companies in the space will no longer be expected to grow its profits and subsequent valuations gradually and modestly over time. Rather, the value of food businesses can be assumed to appreciate exponentially and in powerful bursts, where long and diligent R&D processes are developed in parallel and sequentially evolve into highly potent business opportunities over time. As such, the old assumptions that food businesses are inherently stable and predictable will be rendered largely useless. In a world where firms are faced with greater uncertainty, but also far greater opportunities for massive success, a complete shift in investors’ mindsets towards this industry will be necessary. Attempting to merely project future cash flows will not only miss the bigger picture completely, but also greatly be largely impossible due to the massive potential that these companies stand to unlock but cannot be known at the time of the valuation exercise. Instead, it will be required to have tremendous knowledge of the greater market trends, along with thorough understanding of how and in what different scenarios food technologies can thrive.
So, what lies beyond? We think it is safe to say that the food sector will occupy a far more central and far more exciting position in the public stock markets, by building on its strengths simultaneously eradicating its weaknesses through technology. Its popular appeal and consumer familiarity will surely be left untouched, making it equally attractive for conservative and value-driven investors as it has been in the past. Compared to history, however, food will now also be able to attract a new generation of daring and visionary investors who bet big on technological advancements, increasing sustainability and the innovation-driven economy. As a result, food companies of the future will experience much stronger surges in valuation and far more exciting stock market journeys than its predecessors. In terms of pure occupational finance, entirely new paradigms of valuation will need to be deployed. DCF, multiples valuation and similar traditional methods is likely to be largely replaced by a far more flexible approach, in combination with more unorthodox approaches like real options frameworks.
At Mycorena, we are positioning ourselves at the center of this development, aiming to build a proprietary technology platform that can be utilized across a wide range of activities in the food industry. In doing so, we aim to inspire financiers and other stakeholders to the huge untapped potential of novel food technologies, and the incredible exponential growth that can be unlocked through investments in the next generation of food manufacturing solutions.
Chief Financial Officer at Mycorena