Celsius (CELH 4.18%) recently reported strong financial results for the second quarter, crushing Wall Street estimates on the top and bottom lines. This strong fundamental performance has catapulted the stock even higher over the past couple of weeks.
That continues a rewarding trend for investors as shares of this booming beverage business are up 4,000% over the past five years. This gain is astronomically higher than either the S&P 500 or the Nasdaq Composite Index.
While the immediate reaction from investors is probably to buy shares and ride the momentum, I think it's a better idea to adopt a more cautious approach. The best thing to do is to learn about key bull and bear arguments for Celsius.
Continue reading to find out why the stock is a screaming buy and why investors should avoid it like the plague.
The bull case: Incredible growth
A stock usually performs as well as Celsius only if it's registering tremendous growth. This is indeed the case here. Sales jumped from $75 million in 2019 to $654 million in 2022, translating into a compound annual growth rate of 106%. The company has found success thanks to the energy drink market seeing such huge demand.
Celsius' expansion strategy involves getting into more retail locations. This has certainly been boosted by its agreement with PepsiCo, which acts as the distribution partner for the business both domestically and internationally.
Celsius is also gaining popularity as one of the best-selling energy drinks on Amazon. The e-commerce site's huge amount of web traffic provides greater visibility with consumers.
A valid argument against the business has been its inability to produce consistent profits. This has definitely been true in previous years. But the situation could be taking a turn for the positive as Celsius generated net income of $41 million in the second quarter versus a $9 million profit in the prior-year period and a $199 million net loss in full-year 2022. This could be the early stages of the business benefiting from operating leverage as its sales base continues expanding.
NASDAQ: CELH
Key Data Points
The bear case: Intense competition
The most important reason, in my opinion, for investors to pause before buying the stock is just how competitive the energy drink market is. There are rival offerings from the likes of Monster Beverage, Coca-Cola, Pepsi, Red Bull, and more. Customers aren't locked into any one brand, so if their tastes and preferences change, which is certainly possible, then Celsius could be dealt a blow.
Besides the lack of switching costs for consumers, there are almost no barriers to entry for newcomers to enter the industry. It seems like new energy drinks are constantly being introduced to the marketplace. What happens if a start-up company catches fire, gains a strong following, and sees its sales surge just like Celsius has? Consumers with little brand loyalty might be less inclined to try or stick with Celsius as a result.
This reality calls into question how durable the company's growth really is. So far, revenue has skyrocketed, but it could be hard to maintain this pace. Competition also hurts Celsius' ability to raise prices and expand its margins, since there are so many other products to choose from, which could make sustainable profits more difficult.
Watch it closely
It's hard to see Celsius' outstanding growth and not get very excited about the business. Consumers are clearly in love with the product, and that specific drink category is experiencing outsized growth. Perhaps investors are hoping that Celsius can one day reach Monster Beverage's market cap of $60 billion, which would be a more than fourfold rise in valuation from its current levels.
However, I am worried about how difficult the competitive landscape is, so I think investors should pay close attention to growth trends, as well as any signs of margins improving.
And at 379 times trailing earnings, the valuation is also extremely expensive. It seems like the stock is priced for perfection right now. Should the company reveal financial results that disappoint Wall Street, shares could decline rapidly. It might be a good idea to keep Celsius on your watch list for now.
