Shares of Celsius Holdings (NASDAQ: CELH) were heading lower last month after the fast-growing producer of energy drinks gave a disappointing sales update regarding its partnership with PepsiCo, and Wall Street analysts cooled on the company.
According to data from S&P Global Market Intelligence, the stock fell 18% in September on the PepsiCo news as investor perception continued to sour on the once-soaring growth stock. As you can see from the chart below, most of the decline in the stock came early in the month on the PepsiCo update.
Celsius' demand is slowing
Starting with the pandemic, Celsius had reported several quarters in a row of blistering sales growth, sometimes in the triple digits. But that period has come to an end, and recent news from PepsiCo helps explain why.
Celsius stock fell 11.6% on Sept. 4 after it said that PepsiCo had overstocked its product, and sales were now cooling as its closest distribution partner scales back on orders to optimize its inventory.
Celsius said that underlying sales trends remain strong in the third quarter, with depletions and sell-through up 10% in the third quarter. However, sales to PepsiCo are expected to be down anywhere from $100 million to $120 million for the quarter, which will significantly affect its overall result.
In addition to the warning from PepsiCo, which seems to have overestimated demand for Celsius, there is some concern that the energy drink market is finally maturing after years of strong growth.
Monster Beverage, the category leader, reported 6.1% constant-currency revenue growth in the second quarter, or 7.4% excluding its alcohol brands, an indication that growth in the category seems to be slowing down.
Analysts greeted the update on PepsiCo by lowering estimates and reducing price targets on Celsius stock. And Jefferies said that Red Bull is taking market share from Celsius with new flavors. Analysts also bet that the company will increase promotions in response to intense competition in the energy drink market, which would weigh further on results.
Lastly, Morgan Stanley said growth for Celsius continued to weaken in September, with scanner data showing sales were up 7% to 8% for the two weeks ended Sept. 21.
Image source: Celsius.
What's next for Celsius
The good news for investors is that after a rocky few months, Celsius stock looks like a much better value, trading at a price-to-earnings ratio of 31.
Investors should expect an ugly third quarter as the consensus now calls for revenue to drop 25% and a sharp decline in earnings per share, but the PepsiCo reset shouldn't affect the stock over the long term.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius, Jefferies Financial Group, and Monster Beverage. The Motley Fool has a disclosure policy.
