Energy drink company Celsius Holdings (CELH -1.61%) has quietly been a market-beating stock over the near and long term. Year to date, the shares are up 10%, easily outpacing the S&P 500, which is down 17%. If we zoom out even more, the results are more impressive. Over the past three years, Celsius has increased 1,540%. By comparison, the S&P 500 has only gained 32% over that same time frame.
Celsius wouldn't be the first energy drink company to put up these kinds of astonishing results. Remember that Monster Beverage has been one of the best-performing stocks in recent history, up more than 170,000% over the past 20 years. Can Celsius keep pace over the long term and possibly match Monster's results?
Here is one green flag and one red flag for investors to consider.
Green flag: Strong growth
By just about any measure, Celsius has been posting impressive growth. Led by sales of its energy drinks, revenue for the company's first quarter of 2022 was up 167%, which represented the fourth quarter in a row with triple-digit revenue growth. Domestic revenue was even stronger with sales up 217% year over year. International revenue was down 10% due to weakness in the European market. The good news is that in all other international markets, sales were up 114%.
Celsius has also made major headway with its online sales. As of mid-April, it was the second-most popular energy drink on Amazon behind only Monster, and its sales on Amazon increased 58% year over year compared to the energy drink category as a whole, which was only up 21% over that same time frame.
Availability in major retail locations is a key part of Celsius' growth strategy. In Q1 of 2022, Celsius products were available in more than 140,000 locations nationally, up from 29,000 in Q1 of 2021. Another growth channel is convenience stores, which increased 88% year over year. Q1 also saw the launch of Celsius products in 589 Sam's Club locations.
Red flag: Questions about financial reporting
Unfortunately, there's one red flag for Celsius that investors should know. In its Q4 2021 press release, the company detailed a "material weakness" with its internal controls over financial reporting. Put simply, a material weakness is when a company's internal financial reporting has problems that could result in financial statements being misstated. What's more, management said that it doesn't anticipate this being resolved until the end of 2022.
While this is something investors should definitely keep an eye on, it doesn't necessarily mean anything nefarious is going on with the company. According to the company's 10-Q, management is working to correct this issue by enhancing monitoring and hiring additional personnel, among other strategies.
In April, Celsius named Jarrod Langhans as CFO. Langhans brings to the position more than 20 years of experience as well as a background in accounting and financial reporting. It seems likely that this hire was made to ensure that Celsius is able to put this concern in the rearview mirror sooner rather than later.
The bottom line
Celsius' revenue growth and expanding store footprint make a compelling case for investors to consider. With a price-to-sales multiple of 16, the stock isn't cheap. That said, the business results do warrant a premium. How much of a premium is what needs to be considered.
If Celsius is able to continue on its current growth trajectory, the valuation may make sense. However, if growth slows or the material weakness results in an actual misstatement of financial results, it could be an ugly outcome for shareholders. Ultimately, an investment decision here needs to balance risk and reward.