Over the past five years, Celsius (CELH 2.12%) has seen its revenue surge more than 1,700%, good for a lofty annualized growth rate of 79%. These kinds of jaw-dropping gains aren't coming from some young and disruptive software business, though.
Unsurprisingly, as a direct result of that fast growth, this beverage company's shares are up an astronomical 2,900% over the past five years. This could be a fantastic opportunity to quench any investor's thirst and ride the momentum to impressive portfolio returns.
Is it time to buy this growth stock? Let's take a closer look.
Incredible fundamental performance
Celsius manufactures and sells popular pre-made energy drinks that are touted as providing health benefits like increased metabolism and greater fat loss. In 2022, 94% of revenue was derived from North America. Growth in recent years has been absolutely spectacular. In 2014, sales were a paltry $15 million. Last year, revenue totaled a whopping $654 million. That's nearly a 44-fold jump.
And while many businesses grapple with the uncertain economic environment, causing sales to slow and margins to take a hit, Celsius looks poised to keep its momentum going. During the first three months of 2023, the company posted record revenue of $260 million, up 95% year over year.
The business is also extremely profitable. Its gross margin expanded to 44% last quarter, up from 40% in Q1 2022. And diluted earnings per share of $0.40 translated into more than a fourfold year-over-year rise.
"Celsius is the No. 3 energy drink brand in the United States, reaching a new market share record totaling 7.5%, doubling its 3.7% share a year ago," Chief Executive Officer John Fieldly said on the Q1 2023 earnings call. Shareholders might also appreciate the fact that the words "recession," "inflation," and "macro" weren't mentioned once on the call with analysts.
Positioned for lasting success
As of this writing, Celsius's market capitalization is almost $11 billion. But many investors hope that it can one day reach Monster Beverage's valuation of more than $60 billion. Looking at these top beverage stocks side-by-side is an apt comparison. Since its initial public offering, shares of Monster Beverage have skyrocketed more than 71,000%. Celsius looks to be on a similar path.
Besides selling its own line of insanely popular energy drinks, Monster's business got a boost from its 2015 partnership with Coca-Cola, which made the soft drink juggernaut Monster's global distribution partner. Between 2015 and 2022, Monster's annual revenue increased by 132%. That's respectable, to be fair, and certainly Coca-Cola has helped. But this growth is much slower than Monster's sales gains in past decades.
There are reasons to believe the Celsius could potentially close the gap with its larger rival. For starters, Celsius is registering much faster revenue growth right now than Monster, which means it's gaining market share. Additionally, just last year, Celsius inked a huge partnership with PepsiCo. As part of the deal, which gives Pepsi a sizable equity stake in Celsius, the energy drink company gets Pepsi's distribution capabilities.
Looking more broadly at the market, energy drinks make up the fastest-growing category within the non-alcoholic ready-to-drink industry. So Celsius benefits by being in the right place at the right time. Wall Street analysts are optimistic about the company's long-term potential, with revenue projected to increase at a compound annual rate of almost 28% between 2022 and 2027.
Risks to consider
Despite Celsius's compelling investment case, the stock isn't cheap: It currently trades at a price-to-sales ratio of 13.8 and a price-to-earnings ratio of 143. There's no question that the optimism is fully reflected in the share price today. This presents downside risk should revenue growth slow, something that could happen in a possible recessionary scenario.
Investors need to also be mindful of this industry. It's full of competition. And there's literally nothing stopping someone with enough start-up capital from launching their own beverage company. This means the barriers to entry are almost nonexistent. In a few years, there could be a new popular health-focused drink that consumers fall in love with.
Pepsi's deal will likely be a win for Celsius over the long term, but it does expose the energy drink brand to customer concentration. In 2022, Pepsi accounted for 22.2% of overall sales. Costco (16.7% of revenue) and Amazon (8.8%) are also critical customers. There's always the risk that these retailers cut or scale back their ties with Celsius, which would seriously hurt the business.
But if you accept these risk factors, while also being comfortable with the steep valuation, Celsius could supercharge your portfolio.
