Many people are none too happy about their 2022 stock returns, but shareholders of the energy drink company Celsius Holdings (CELH -0.96%) might be an exception. The stock gained a whopping 39% in 2022. But the tables have turned so far this year, and shares have fallen nearly 30% from their high.
The company's been around since the early 2000s, and only after two listings and years of spinning its wheels did the brand begin to gain traction. Still, the stock's been a revelation more recently, a multibagger that's turned $1,000 into $20,000 in just the last three years.
So is this a stock you should buy the dip on? Or has the clock struck midnight, and the magic's wearing off? Here is why investors should keep Celsius planted firmly on their radar.
PepsiCo partnership could fuel the next leg of growth
Celsius was founded in 2004 but heated up only after former CFO John Fieldly took over in 2018. Revenue has skyrocketed, especially over the past few years, which attracted interest from PepsiCo (PEP 0.61%), one of the most prominent players in the food and beverage world. Last summer, PepsiCo invested $550 million into Celsius in exchange for convertible preferred stock, an estimated 8.5% stake in the business.
CELH Revenue (TTM) data by YCharts
PepsiCo's investment serves two essential purposes from Celsius' point of view:
- First, it infuses much-needed capital into Celsius. The company ended 2022 with $614 million in cash and short-term investments, much more than at any point in its history. That's more capital for marketing and inventory, which should fuel growth.
- Second, Celsius can benefit from PepsiCo's strong distribution network, landing premium shelf space at points of sale.
Celsius generated $653 million in revenue in 2022. Analysts' estimates for 2025 sales average nearly $1.8 billion. None of this is a given; Celsius must ultimately deliver the goods. Still, it's clear expectations remain high for the company moving forward.
The bottom line is heating up
Celsius is rapidly growing, but that hasn't stopped it from posting a profit in the past; the company earned $0.05 per share in 2021. However, termination fees ($194 million) from existing distributors before the PepsiCo deal pushed the bottom line to a per-share loss of $2.63.
Strong profit margins could be an underrated aspect about Celsius. Its gross profit margin increased in 2022 to 41.4%, up from 40.8% in 2021. One could argue that's mighty impressive for a company in a ruthlessly competitive field (and in a year marked by high inflation).
Investors should look for strong EPS growth in the future -- analyst estimates call for Celsius to earn $2.34 in 2025, a significant turnaround from its 2022 numbers and noticeably higher than its 2021 profits.
A long-term story with multiple possible endings
Some may argue that Celsius has a steep price tag, especially in this market. I understand. The stock trades at a price-to-earnings ratio (P/E) of 36 using 2025 EPS estimates. That doesn't leave much margin for safety, and a lot can go wrong between now and 2025. In this market, where so many great growth stocks trade at multi-year lows? Yeah, feel free to find lower-hanging fruit.
But consider these two possibilities. first, Celsius remains small enough that its growth story could continue for years. Rival energy drink maker Monster Beverage (MNST 0.18%) is many times larger than Celsius and still commands a P/E of 46. In other words, a successful growth story can stay expensive for years. A dollar-cost averaging strategy to slowly buy the stock could help prevent you from overpaying.
Second, don't underestimate PepsiCo's involvement with Celsius. The company's already shown interest in the energy drink market: It bought energy drink brand Rockstar for $3.85 billion years after initially supporting it with a distribution agreement (sound familiar?). If PepsiCo ever seeks an acquisition, vigorous growth and profitability could command a hefty premium, a likely win for shareholders.
The bottom line? Celsius has multiple paths to making long-term investors happy, whether via sustainable growth or an eventual acquisition. There's nothing wrong with being hesitant to buy today, either. Shares aren't cheap even after their pullback, so you could get a better opportunity later.
