If I asked you to name the best-performing stock since the year 2000, I doubt you would get the answer. Up more than a 1000-fold since the turn of the millennium, Monster Beverage -- maker of popular energy drinks -- is a stock few are likely to mention. With a strong brand following, growing opportunity, and fantastic margins, it has consistently grown its revenue and profits for the last 20-plus years and currently dominates the energy drink market.
But there is now a new kid on the block in energy drinks, and it is growing rapidly. The company is called Celsius Holdings (CELH 1.38%), maker of Celsius energy drinks, whose stock is up a whopping 30-fold in the past five years. Can this fast-growing brand turn itself into the next great energy drink stock, matching Monster Beverage? Let's investigate.
Q1 earnings: More blowout results
Celsius is a health-focused energy drink brand. It positions itself as a drink with healthier ingredients that has no sugar, is loaded with vitamins, and is clinically proven to help you burn fat (I'll let you analyze the clinical studies yourself). This nicely positions the brand for consumers vs. the legacy providers like Monster and Red Bull, whose offerings have a lot of artificial ingredients and sugar.
In Q1 of 2023, this strategy continued to work like a charm. Celsius's revenue grew 95% year over year to $260 million, greatly outpacing the growth of the overall energy drink market. Margins are also expanding at scale, with gross margins jumping to 43.8% in the quarter compared to 40.4% a year prior.
Celsius is not very profitable right now as it is investing a ton in sales and marketing, but the business still generated a positive $34.4 million in net income in the period. As long as it continues growing its sales at such a rapid clip, investors shouldn't complain about minimal net income generation. Bottom-line profits will arrive eventually as the business matures.
Over the long term, growth might look even more impressive. In the first quarter of 2017, Celsius was generating only $6 million in sales, meaning it has multiplied its revenue by more than 40 in only six years' time. That is some astounding growth and shows how much the health-conscious drink brand is resonating with consumers.
PepsiCo distribution partnership is a game changer
To step up its growth plans, Celsius made a huge announcement near the end of 2022. The company is joining PepsiCo's distribution network, which will get it into even more stores around North America and help it easily expand the brand internationally.
Why is Pepsi doing this? Because it invested $550 million into Celsius in exchange for preferred stock that pays a 5% annual dividend. In future years, PepsiCo will be able to exchange these preferred shares for Celsius common stock, which would give it 8.5% ownership of the company, assuming no further share dilution.
This looks like a win for both companies. Celsius can supercharge its international growth plans, while Pepsi gets a dividend on its preferred stock every year and can participate in the upside if the Celsius business keeps growing through the common stock conversion. Investors should track international revenue growth over the next three to five years to see whether this deal with Pepsi is successful.
Valuation has gotten ahead of itself
There is a ton to like about Celsius's business. It has a good track record of growth, it has expanded its margins, and now it has a competitive advantage vs. other health-conscious brands through its partnership with PepsiCo. Higher revenue and profits look very likely in the years to come.
CELH Revenue (TTM) data by YCharts
But you can never exclude valuation when discussing a stock, and there is a lot to be desired when it comes to Celsius. Shares currently trade at a market capitalization of $10.1 billion compared to just $331 million in trailing-12-month gross profit. That gives the stock a trailing price-to-gross-profit (P/GP) of about 30. Even if gross profit triples over the next three years, the stock will still trade at a far higher P/GP than the average stock's, which typically sits between 5 and 10.
Long story short, Celsius shares trade at an extreme premium right now and are likely overvalued. If you still like the business and want to own shares someday, the right course of action is to keep the stock on your watch list and be ready to buy shares if they ever take a significant fall. Buying shares at these high prices comes with a lot of risk and is probably an unwise move right now, no matter how fast the business is growing.
