Celsius' (NASDAQ: CELH) stock is down nearly 60% since it hit its record high this March. The energy drink maker's stock fizzled out as investors fretted over its slowing sales growth, declining domestic market share, and some big inventory reductions at its distribution partner PepsiCo(NASDAQ: PEP). It also struggled to maintain its high valuations in a high interest rate environment.
Nevertheless, now could be the right time to buy Celsius' stock. There are four simple reasons why.
1. Celsius is still one of the fastest-growing beverage makers
Celsius carved out a niche by selling sugar-free energy drinks made from all-natural ingredients like green tea, ginger, and taurine. That strategy attracted a lot of attention from younger health-conscious consumers, and Celsius' annual revenue more than doubled in each of the past three years.
Image source: Getty Images.
That's why the bulls were disappointed when Celsius' revenue only rose 29% year over year in the first half of 2024. However, that slowdown wasn't too surprising because fully lapped its new domestic distribution deal with PepsiCo, which started in August 2022 and significantly boosted its sales throughout 2022 and 2023.
Analysts expect its revenue to only rise 19% this year, but they expect it to continue growing at a compound annual growth rate (CAGR) of 25% from 2024 to 2026. That would still make it one of the fastest-growing beverage makers in the world. Its larger competitor, Monster Beverage(NASDAQ: MNST), is only expected to grow at a CAGR of 8.5% from 2023 to 2026.
2. Celsius' near-term headwinds aren't that severe
On May 28, Nielsen reported that Celsius' U.S. market share had dipped 30 basis points on a weekly basis to 10.5%. By the week ending on Aug. 10, its share had slipped to 9.6%. That ongoing decline might seem like a red flag since Celsius still generated 95% of its revenue from North America in the first half of 2024.
However, Nielsen's latest data showed that Celsius actually grew faster year over year than all of its domestic competitors in the four weeks leading up to Aug. 10. Celsius' sales rose 8.8% year over year, which outpaced Red Bull's 1.8% growth and Monster's 3.5% decline (excluding its acquisition of Bang energy drinks from Vital Pharmaceuticals last year). On its own, Bang grew 6%. In other words, Celsius is still growing even as the energy drink market gets more crowded.
The expansion of Celsius' fledgling international business could also offset the slower growth of its North American business. It recently signed a new distribution deal with the Japanese beverage giant Suntory to sell its drinks in the U.K., Ireland, and Canada, and its domestic partnership with PepsiCo could eventually evolve into an international one. It's also selling a lot more products on Amazon, which contributed 10% to its second-quarter sales.
PepsiCo's recent inventory reductions also don't necessarily mean the domestic market's demand for Celsius drinks is drying up. It's fairly common for a distribution partner to reduce its inventories of a new drink as a deal matures, and Nielsen's latest data indicates Celsius' U.S. sales are still increasing despite the inventory reductions. It also wouldn't make sense for PepsiCo to intentionally throttle Celsius' growth when it already owns an 8.5% stake in the company.
3. Celsius' margins are still expanding
If Celsius were in trouble, we would have seen its gross and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins shrivel. But this is what actually happened over the past four and half years:
Metric | 2020 | 2021 | 2022 | 2023 | 1H 2024 |
|---|---|---|---|---|---|
Gross margin | 46.6% | 40.8% | 41.4% | 48% | 51.6% |
Adjusted EBITDA margin | 12.2% | 10.7% | 10.9% | 22.4% | 24.9% |
Data source: Celsius Holdings.
For 2024, analysts expect Celsius' adjusted EBITDA to rise 11% and lift its adjusted EBITDA margin to 29.5%. From 2024 to 2026, they expect its adjusted EBITDA to grow at a CAGR of 12%. That rosy outlook implies that economies of scale are kicking in.
4. Celsius stock looks reasonably valued
With an enterprise value of $9 billion, Celsius is valued at 6 times this year's sales and 25 times its adjusted EBITDA. Those valuations are reasonable relative to its growth rates and its industry peers. Monster, which is growing at a much slower rate, trades at 6 times this year's sales and 20 times its adjusted EBITDA.
Celsius might not be a hypergrowth stock anymore, but it still has plenty of upside potential. Its stock price could remain volatile, but it should stabilize and rally back toward its all-time high as the company overcomes its near-term challenges.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Celsius, and Monster Beverage. The Motley Fool has a disclosure policy.
