Celsius Holdings (NASDAQ: CELH) has been both inspiring and frustrating to investors. Few stocks have matched its more than 2,000% gain over the last five years as finding a niche in the market and the right distribution partner has produced massive returns for investors.
The frustration comes as investors turned on the beverage stock as a key distributor adjusted its inventory purchase. This significantly reduced what was as much as a 7,200% gain within the five-year period.
Despite such concerns, the buy case for Celsius stock likely still stands, and three reasons explain why.
1. Its niche in a growing industry
Admittedly, Celsius may appear to break an investing rule at first. Former GE Aerospace CEO Jack Welch famously listed as his criteria that a company be the largest or second-largest company in its category. Celsius continues to lag far behind Red Bull and Monster Beverage in terms of market share.
Image source: Statista.
However, unlike competitors, it emphasizes the natural ingredients in its beverages. For the stimulant, it uses the seeds of the guarana plant, which is native to the Amazon rainforest. Its seeds contain over twice the caffeine content of coffee beans.
This approach amounts to a competitive advantage that allows it to reach health-conscious consumers who might feel hesitant to consume energy drinks of any kind. It may even help it compete with more traditional caffeinated beverages like coffee or tea.
2. The state of Celsius' financials
Indeed, the immediate financial results look more like a reason not to buy the stock. For the third quarter of 2024, its $266 million in revenue fell 31% from year-ago levels. Also, even if including the results for the first three quarters of 2024, the fact that its $1 billion in revenue grew only 5% is probably not going to inspire growth investors.
The company cited a "distributor's inventory optimization" as the reason for the drop. This distributor is likely PepsiCo, which signed a distribution deal with Celsius beginning in 2022. Even if PepsiCo purchased too much product in past years, it will likely learn from this mistake, making it less of a concern in the future.
Moreover, Celsius has made the most of its past gains based on its U.S. distribution, with international sales making up 5% of revenue so far in 2024. As international sales become more critical to the company, it's likely to reinvigorate growth by focusing more on these markets, which could take the stock higher over the long term.
3. Valuation
Additionally, the recent struggles appear to give investors a reason to buy Celsius stock at a discounted valuation. Indeed, many investors are not going to see Celsius stock as cheap when its P/E ratio is 40. Nonetheless, that valuation is a multi-year low for the company, and considering the long-term growth of the stock, some investors may feel it is worth the premium.
The price-to-sales (P/S) ratio of 5 appears to confirm the discounted valuation. The last time its sales multiple was that inexpensive was in 2020. Thus, the uncertainty over the aforementioned inventory correction could make this an excellent time to buy the stock.
Investing in Celsius stock
Despite what is likely a temporary slowdown in purchases, the state of its business, its financials, and valuation metrics make Celsius stock a buy.
Despite a smaller size, Celsius serves a critical niche in the energy drink industry by taking a nature-based approach. Considering the health consciousness of many consumers, that can not only take share from competitors but open the energy drink industry to a segment it would otherwise not reach.
Moreover, the slowdown in distributor purchases is likely temporary, and Celsius has barely begun to tap the international market, a move that could supercharge sales. Considering that its P/E ratio and sales multiples are at multi-year lows, investors should consider taking advantage of the stock's pullback to add shares of Celsius.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius and Monster Beverage. The Motley Fool has a disclosure policy.
