Energy drink company Monster is one of the market's greatest all-time performing stocks, appreciating enough to turn a $10,000 IPO investment into more than $400 million today. But these success stories are rare, and investors should take comparisons to companies like Monster lightly.
That said, there's a lot to like about another energy drink company called Celsius Holdings (CELH 1.72%). The stock has crushed the market, up more than 1,100% since January 2020. It may not end up as big as Monster, but here's why the stock can keep winning moving forward.
Rapid market expansion driving growth
Step one for any consumer product is to penetrate retail channels; you can't sell a product that nobody sees. Celsius has done a good job of building relationships with many key retail channels in the United States, including big-box retailers, fitness centers, convenience stores, and more. The company has more than 118,000 points of sale established in the U.S.
Image source: Getty Images.
Celsius continues to expand its channels, growing its convenience store locations by more than 20,000 through three quarters of 2021. As a whole, it added 38,000 points of sale in 2021 through the third quarter, a 48% increase from the beginning of the year.
Revenue growth is strong as a result, increasing 157% year over year in Q3 to $95 million. Those sales were overwhelmingly concentrated in North America; international sales were just $10.4 million for the quarter, a 5% increase over 2020. There's a lot of room for growth in North America, but investors will still want to see if the brand gains international traction over time.
Taking market share with room to run
Food and beverage is a ruthlessly competitive industry, where established companies are fighting for consumer dollars. This holds true in the energy drink market, where big companies like Monster play as well as brands like Rockstar that huge conglomerates like PepsiCo own.
It's not easy to walk into an established market and carve a niche for yourself, but Celsius is doing it. Its estimated market share of the energy drink industry has grown from almost zero to more than 2% in three years. There's a lot of room for market share to grow, and clues that it is doing so.
CELH Accounts Receivable (Quarterly) data by YCharts
You can see in the chart below how accounts receivable, which are essentially orders placed and under contract but not yet paid, are accelerating. It could be a signal that short-term revenue growth remains strong.
Additionally, Celsius sells its products on Amazon and reports that it currently commands an 18% share of the energy drink category, second only to Monster. Amazon is such a massive marketplace that Celsius's popularity could indicate what its overall market share could look like as its retail footprint matures over time.
Improving profits despite headwinds
Like many other companies, Celsius is working through increased costs due to inflation. Due to rising freight, packaging, and aluminum costs, the company's gross profit margin fell from 53.7% in Q3 2020 to 48.6% in Q3 2021.
This directly affected profits, reducing net income 44% year over year in Q3 2021. Still, Celsius remained profitable at $2.7 million in net income. Through three quarters of 2021, net income has grown 6% year over year.
Management expects many of these additional costs to be transitory, but it's still encouraging that its financials are holding up during these challenges. Celsius has $61 million in cash on hand, so it hopefully has the liquidity to keep funding its growth efforts in the current high-inflation environment.
Is the high price tag justified?
A company that's appreciated more than tenfold in just a couple of years would understandably be a popular stock. Investors have traded Celsius up to a price-to-sales (P/S) ratio of just under 20, even after the share price has fallen more than 40% from its all-time high. Technology stocks typically get such valuations -- not beverage makers. Monster's P/S ratio is just eight, for reference.
However, Celsius is growing rapidly, and that could continue. Current analyst estimates are projecting revenue to grow 63% in 2022. The company could grow into its premium valuation over time, but it seems clear that the stock is expensive today, which could mean underwhelming returns in the short term.
A dollar-cost averaging strategy, where you slowly build a position over time with small purchases, can be a great way to invest without risking buying at a "top."
