Deteriorating by 72% within 6 months, is Celsius still a Lucrative Investment Option Worth Pursuing Presently?
Once-scorching investment prospect Celsius Holdings (CELH -0.62%) has experienced a chilly downturn, dropping an agonizing 73% in a mere six months. Profit margins have nosedived, yet Celsius continues to capture market share and broaden its product range and geographical presence. Let's delve into the reasons behind the steep market correction. Could this growth stock present an attractive buying opportunity now?
Celsius' meteoric rise
In 2022, Celsius sealed a distribution accord with stalwart PepsiCo – granting Celsius a dependable ally and entry into fresh market segments. This partnership enabled Celsius to shake up a sector that enjoys considerable popularity: energy drinks within the non-alcoholic ready-to-drink (NRTD) category.
To appreciate the significance of this category, consider that industry titan Monster Beverage occupies the No. 2 position, falling just behind Red Bull. Despite this, Monster boasts a market cap eclipsing $50 billion. In contrast, behemoth Coca-Cola boasts a market cap of $266 billion – meaning that if Monster were merged with Coca-Cola, Monster would likely emerge as the soft drink giant's second-most-valuable asset (next to Coke itself).
A sour point for investors considering long-term investment in Coca-Cola lies in the future of sugar-laden drinks and synthesized juices, given increasing health consciousness and evolving flavor trends. Ready-to-drink (RTD) coffee and tea will constantly battle price and taste with made-to-order alternatives. However, energy drinks excel in this category through their caffeine content and indulgent flavor palettes.
Celsius exploited this advantage by peddling sugar-free energy drinks claiming health benefits. Effectively, Celsius perfected the ultimate RTD beverage through the creation of four product categories and innumerable flavors:
- Flagship sugar-free Celsius beverages, claimed to boost metabolism and burn off body fat.
- Celsius Vibe, boasting less caffeine and catering to exotic flavor preferences.
- Celsius Essentials, attracting "fitness fanatics seeking performance enhancement" with even more caffeine than the base line.
- Celsius On-The-Go powder stick packets.
Celsius has skillfully engineered new flavors, refined its catalog, and translated these advancements into substantial financial gains. Sales and profits have soared due to enhanced margins, strategic partnerships, and global expansion into markets such as Canada, the U.K., Ireland, Australia, New Zealand, and France.
In Q3, Celsius reported owning an 11.6% market share in the U.S. energy drink category and a 12.1% share of retail sales compared to 27.8% for Monster and 36.3% for Red Bull.
Celsius triumphs by partnering with major retailers like Costco Wholesale and Amazon. Celsius sales to Costco increased by 15% in the recent quarter, but sales to Walmart-owned Sam's Club and BJ's Wholesale Club fell. Total club sales, referring to wholesale outlets, amounted to $60.5 million in the recent quarter – nearly 23% of total sales.
Conversely, Amazon sales surged 21% to $27 million during the quarter, representing around 10% of quarterly revenue. It's worth noting that a third of Celsius' sales come through these channels, rather than traditional grocery stores, convenience stores, drugstores, Walmart, Target, etc.
Celsius' latest quarter experienced its steepest decline in years
Celsius' stock plummeted because its growth trajectory proved less sustainable. As indicated by the company's Q3 presentation, "In the last three years, Celsius has grown 2.3 times more volume than Red Bull, Monster, Alani, and Rockstar combined." Celsius wrested a prime market share while doubling revenues and enhancing profitability.
As is shown in the following chart, sales skyrocketed, and the firm became extremely profitable.
However, in the recent quarter, Celsius posted a zero net profit per share, a slimmer gross margin, and a 33% decrease in North American revenue versus the same quarter last year. Management attributed reduced margins to a new supply chain scheme implemented by its largest distributor, suggesting that the slowdown may have been unjustifiably exaggerated. Nevertheless, Celsius refrains from offering guidance, which doesn't exactly inspire confidence that management possesses a firm grasp on the company's future.
The valuation appears more reasonable
The challenge with companies like Celsius is that stock prices can experience extreme volatility based on market momentum. When Celsius was racking up multi-year growth rates, revenue projections could spiral. However, when momentum wanes, some investors may deem Celsius worthless except for its present-day value.
Celsius' stock correction was warranted, given that the share price appeared overvalued. However, Celsius' valuation now appears far more reasonable. As aforementioned, Celsius now has a 12.1% market share in U.S. energy drink retail sales, while Monster controls 27.8%. But Celsius' market cap has dwindled to $6 billion – overshadowing Monster's market cap by a factor of eight. Moreover, Monster boasts a much wider global presence than Celsius.
Additionally, Celsius' future growth prospects don't appear too lofty for a venture catapulting physical sales. It has a price-to-earnings ratio of approximately 36 – not an exorbitant figure considering the company didn't contribute to its most recent earnings report. Celsius also exhibits a price-to-sales ratio of 4.4, the lowest in over four years.
Celsius remains fraught with risks worth pondering over
Celsius finds itself at a carefully balanced position. Previously, Celsius was seizing market share and emerging as a promising newcomer in the energy drink market. Currently, however, it holds the third spot, implying greater risk if it fails to live up to investor expectations. Even if its growth rate slows down, investors will presume it must at least maintain its current market share.
The stock's price movement is expected to remain unpredictable, influenced significantly by short-term performance. A disappointing quarter could intensify doubts about the investment strategy and motivate additional sell-offs. Conversely, a successful quarter might imply the dip was momentary and signify Celsius's return to growth.
At present, many investors may opt for a cautious approach towards Celsius. However, more daring investors might be interested in delving deeper since the valuation is at its best in years.
In essence, Celsius' long-term success hinges on how the public responds to its offerings and its ability to transform occasional consumers into loyal collaborators. (Incidentally, I've tried Celsius, Monster, and Red Bull, and I believe that Celsius boasts an unequivocally superior product range.)
If you're committed to investing in Celsius, you might find it beneficial to sample the product, evaluate its alternatives, and analyze how Celsius showcases its beverages against competition.
During this period of market correction, Celsius may look for new ways to invest its financial resources wisely, potentially exploring opportunities in research and development to innovate its product line.
Despite the current downturn, the company's strong market share and aggressive expansion into international markets could position Celsius as an attractive investment option for those looking to diversify their finance portfolios in the energy drink sector.