Energy drink company Celsius Holdings (CELH -0.50%) has been a sensational investment, returning more than 2,100% over just the past three years. It's similar to Monster Beverage, one of the most successful stocks ever.
Lightning doesn't strike twice in the energy drink industry. Or does it? Today, Celsius trades near its 52-week high and commands a lofty valuation based on past financials that might send investors running away. But don't jump to conclusions; hear me out.
Celsius stock is a buy, and here is why.
Celsius' significant distribution pact will set off massive growth
Distribution is the key ingredient for food and beverage products. You can't increase sales of a product if nobody has access to it. Celsius, which makes energy drinks with natural ingredients and markets to the fitness industry, has done a bang-up job building distribution on its own. It's become one of the category leaders on Amazon and has grown from about 82,000 store locations at the beginning of 2021 to 210,000 today.
The company's success caught the eye of industry titan PepsiCo, which invested $550 million into Celsius in late 2022 and became its preferred global distribution partner. PepsiCo's partnership has only just begun, and the company's backing will accelerate Celsius' distribution growth, opening doors with retailers much faster than Celsius going it alone.
Perhaps more importantly, PepsiCo's size and expertise will help Celsius succeed overseas. So far, just $36 million of the company's $654 million in 2022 revenue came from international markets. A greenfield of expansion is ahead if the product gains similar traction with international consumers as with Americans.
Profits are heating up
Celsius is poised to rapidly increase earnings as revenue grows faster than expenses (operating leverage). You can see below in the chart that free cash flow has turned positive. Although net income was negative in the latest quarter and for full-year 2022, that's because Celsius had to pay fees for terminating its existing distributor agreements to enter the PepsiCo partnership.
Data source: YCharts CELH Revenue (TTM)
With that in the rearview mirror, look for fireworks on Celsius' bottom line. The average analyst estimates peg earnings per share (EPS) at $1.05 this year and rising in the years to come. PepsiCo invested $550 million into Celsius as part of their partnership in exchange for shares of preferred stock. With zero debt on the balance sheet and $614 million in cash on hand, share repurchases could be on the table, further boosting EPS growth.
The stock isn't cheap, but it isn't as expensive as it looks
An abundance of good news hasn't gone unnoticed by Wall Street. The stock trades at a forward price-to-earnings (P/E) ratio of 87, making it hard to call the stock cheap. But calling Celsius a buy isn't as insane as it sounds at face value.
If you pull up the valuation of its peer, Monster Beverage, the stock trades at a P/E of more than 40, though its expected earnings growth is nowhere close to that of Celsius. Looking further out, Monster is trading at a P/E of 28 using its average 2025 EPS estimate, and Celsius trades at a P/E of 41 based on its 2025 EPS estimate.
Data source: YCharts CELH EPS LT Growth Estimates
Paying such a high valuation for a stock can feel painful, but the price tag quickly becomes reasonable if Celsius can meet analysts' expectations. Owning the much faster-growing Celsius may prove to be the better long-term investment compared to Monster, with its slower earnings growth.
You don't have to jump into the stock with both feet. Instead, buy slowly over time, using a dollar-cost averaging strategy, and be opportunistic if the market offers a dip in the share price. Celsius has all the ingredients of a long-term winner.
