Investors love companies that split their stocks. While a stock split doesn't change any of the underlying fundamentals of a company or its stock valuation, it can be a strong signal to investors from management. A company wouldn't act to lower the price of an individual share of its stock if it wasn't confident the share price would move higher over time.
There's a growing list of high-profile growth companies that have split their stocks over the last two years. The newest addition to that list, Celsius Holdings (CELH 2.12%), is one for investors to consider adding to their portfolio if they haven't already.
The latest entry into the stock-split club
Celsius completed its 3-for-1 stock split on Nov. 15. Shareholders of record on Nov. 13 each received two additional shares for each share they owned. As a result, Celsius' share price was cut by two-thirds. While the number of shares they owned increased, shareholders' positions were the same value after the stock split as they were before.
Celsius joins fellow energy drink maker Monster Beverage (MNST 0.41%) in splitting its stock this year. Monster executed a 2-for-1 split in March. But Monster stock hasn't done well since its split. Shares are up less than 5% since investors got their extra shares in March. Over the same timeframe, the S&P 500 is up 14%. Celsius stock is up a whopping 74% in that time.
But there's reason to remain optimistic that Celsius' future performance won't have the same energy as Monster's.
Not just taking market share, expanding the market
Celsius got its start way back in 2005 with a focus on the health niche. According to the company, weightlifters would drink Celsius before a workout to improve energy and blood flow. That focus led Celsius to formulate a drink that's generally healthier than competitors in the market like Monster or Red Bull.
It turns out that there's a much broader demand for an energy drink without added sugar or artificial flavor than gym-goers. However, it wasn't until recently that Celsius shifted its messaging to promote itself as a lifestyle brand and it really hit its stride. Now, management boasts that it appeals to different demographics than competitors. In fact, it says 44% of its buyers are new to the energy drink category.
That's helped it grow its market share significantly. Overall, its market share in physical stores has more than doubled in the last 12 months from 4.4% to 10.5%. Additionally, it now claims the No. 1 spot on Amazon for energy drink brands with 21.4% of sales. That was driven by a 42% increase in sales on the e-commerce leader's marketplace.
But the real potential is in the fact that it's bringing new demographics into the market, expanding into new parts of the day during which they'll drink an energy drink like Celsius, and it's still just getting started.
A lot more growth for Celsius to unlock
There are three big areas where Celsius still has a lot of room to grow: international expansion, improving distribution, and pricing.
Celsius is still in the very early stages of its international expansion. It currently has relatively small operations in Hong Kong, China, and the Nordic countries. But with its distribution partnership with PepsiCo signed in 2022, it now has a much easier path to international expansion. It's going to start distributing in Canada next year and has big plans for 2025 and 2026, as well.
While the U.S. is by far the heaviest consumer of energy drinks, the product is also popular in markets like the U.K., Japan, Germany, and Spain, where PepsiCo provides distribution channels for Celsius. And with Celsius' track record of expanding the market in the U.S., it could very well do the same in international markets.
Even within the U.S., there's a lot of room to improve distribution. Just compare Celsius' store presence to its peers like Monster and Red Bull. Management points out its competitors have 25 unique products in an average store with 40 "facings," the number of spaces on the shelf. Celsius, by comparison, says it has, on average, 15 products each with a single facing. What's more, it usually has worse shelf space than Monster or Red Bull.
Celsius also has more opportunities to grow its presence in convenience stores where it's underperforming relative to other channels. And it's also using the PepsiCo partnership to push into more food service channels.
Image source: Getty Images.
Finally, there's long-term potential for Celsius to raise its pricing. Red Bull costs nearly twice as much as Celsius. That's in large part because Red Bull has built a strong enough brand that it can command pricing power. Celsius isn't there yet, but management believes it does have some price elasticity that would allow it to raise prices if it wanted to without negative consequences to demand. It last raised prices at the start of 2022.
For now, management sees a lot better growth opportunities of keeping its price the same while Red Bull and Monster might raise prices. It could end up taking customers away from the two behemoths of the industry with better pricing.
Investors should be hot for Celsius
Celsius is growing at a breakneck pace and the outlook remains as strong as ever.
Last quarter sales grew 104% year over year, led by a 108% increase in North American revenue. What's more, gross margin expanded by 860 basis points, exceeding 50%. That puts it very close to Monster's 53% gross margin last quarter. But considering Monster's more vertically integrated than Celsius it should produce a better gross margin, all things considered. The fact that Celsius is even close is a sign of its product's long-term profit potential.
The only big drawback of Celsius stock right now is its valuation. It's priced high with a forward P/E of 55.9. Monster's stock, by comparison, trades for just 30x analysts' estimates for 2024 earnings.
But the growth potential for Celsius makes it worth the price. Analysts expect Celsius to grow earnings over 55% per year, on average, over the next five years. That gives it a PEG ratio of about 1, which is a sign that the stock is well worth the price. By comparison, Monster's PEG ratio is (a very respectable) 1.33.
Despite the lofty expectations for the company, there's a clear path to continued growth for Celsius as long as management is able to execute. Based on its track record over the past few years, and the confidence signaled by the stock split, it looks like it can do that.
