There's no doubt that Celsius (CELH 6.57%) has been one of the best investments in recent years. Since September 2018, its shares have skyrocketed a ridiculous 4,520%, meaning a $10,000 purchase back then would be worth $462,000 today. That performance has crushed the 72% gain of the Nasdaq Composite.
The stock has also soared in 2023 thanks to strong financial results that have boosted investor optimism. But should this energy beverage business be in your portfolio right now? Here's what you should know before buying.
Incredible growth trajectory
Celsius, which is riding the wave of increased demand for energy drinks, focuses on what it calls "functional energy." The company provides consumers with various beverages that include vitamins, minerals, and caffeine, even claiming that its products can help boost metabolism and fat loss. Management believes the trend toward health and wellness is working in its favor.
Key to Celsius' strong stock gains has been remarkable growth. Just in the most recent quarter (the second quarter of 2023), revenue increased by 112% compared to the year-ago period. And this is on the back of 108% sales growth in 2022.
For a consumer-facing brand like Celsius, it has been absolutely critical for the company's popular energy drinks to find their way into more retail locations as broad exposure leads to more sales opportunities. Even on Amazon, the largest e-commerce site in the U.S., Celsius sales are quickly rising.
But there's been a major development that can take this brand to new heights, and that's a partnership with PepsiCo. Celsius entered into a deal with the beverage giant last year that would make Pepsi its distribution partner both domestically and overseas. About 95% of Celsius' total revenue last quarter came from North America, and Pepsi has the potential to drive outsize growth in international markets.
NASDAQ: CELH
Key Data Points
Is there a competitive advantage?
Any long-term investor should be analyzing this business for signs that a competitive advantage is present. For Celsius, a reasonable assumption might be that the company's brand strength is the key ingredient for its rapid ascent in recent years. By bolstering how its brand is perceived, the company could position itself for lasting success.
One way to check for this is to look at profitability. In the latest quarter, Celsius registered a superb gross margin of 48.8%. That's impressive, but it's not quite at the 52.5% level that Monster Beverage posted last quarter. The gross margin for Celsius has lagged its larger rival in the past, but it's definitely making progress to reach parity. Therefore, I think it's accurate to say that that the business lacks a true competitive advantage at the moment.
The valuation is steep
With incredible growth prospects and a stock that has trounced the overall market, it's not too surprising that the valuation isn't cheap today. Shares trade hands at a forward price-to-earnings ratio of about 113 and a forward price-to-sales ratio of 12. These are truly excessive valuations that are more akin to a high-flying software enterprise as opposed to a drink company.
A high valuation leaves almost no margin of safety for potential investors, as the optimism is fully priced in. There's certainly the possibility of revenue or earnings gains that disappoint investors and cause the stock to drop meaningfully in no time. So, the question to ask is: Is the promise of huge growth worth the current price tag?
What should provide some encouragement is just how strong of a financial footing this business has. As of June 30, Celsius had cash and cash equivalents of $681 million versus total liabilities of $444 million on its balance sheet. That can provide some downside protection, while giving investors peace of mind that the company won't run into financial troubles anytime soon.
Investors need to weigh the facts before buying Celsius. The growth is outstanding and can be an intriguing characteristic for investors who prioritize these rapid gains above all else. But the expensive valuation, coupled with the lack of a clear competitive advantage, are important reasons to pass on the stock today.
While I'm not a buyer today, I'm watching this business closely to see how its position in the industry develops.
