Even After a 30,000% Return Over the Last 10 Years, This Stock Could Go Parabolic. Here's Why.

One of my fondest memories of being a teenager was going to midnight premieres at the movie theater. My friends and I were huge fans of the Harry Potter franchise -- so much so that we'd dress up as the characters and attend the midnight showing each time a new installment was released.

To supplement our adrenaline and excitement, we'd often go to convenience stores before the movie and grab some energy drinks for a much-needed caffeine supply. At the time, Monster Beverage and Red Bull were pretty much the only options. Or so I thought.

A little-known brand called Celsius Holdings (CELH 2.12%) was also a player in the energy drink market. However, the company's shelf space paled in comparison to its cohorts, making it easy to overlook.

The story of Celsius and its rise to become a dominant player in the energy drink industry is the epitome of a Hollywood comeback story. After a 30,000% return over the last decade, Celsius has literally minted investors as billionaires. And although that type of return may make some investors feel that it's a missed opportunity, I'd encourage you to keep an open mind. After a thorough analysis of the company's operation, I am more bullish than ever. Now could be an incredible time to open up a position in this growth stock, before it has another stratospheric run.

An evolution like none other

The corporate history of Celsius is anything but linear. The company was founded back in 2004 and went public for the first time four years later. However, after a few years of shaky performance, the company was delisted from public exchanges. While a stock delisting is rarely a good thing, Celsius managed to turn its operation around and its second act has been nothing short of extraordinary. The company managed to stay afloat after its delisting due to a series of investments by an independently wealthy entrepreneur.

Celsius used the outside funding to completely reinvent itself. After several management changes and a rebranding of its energy drinks, the company began to finally gain some traction. Celsius went public (again) in 2017 and spent a few years trading at penny stock levels. But in 2020, everything changed following a distribution deal with AB InBev, Keurig Dr Pepper, and what is now Molson Coors. The deal represented a shift for Celsius' allowing the energy drink to expand and broaden its consumer reach. As seen in the following section, the partner network allowed Celsius to begin generating more meaningful growth. Unsurprisingly, this is about the time the stock started to get on investors' radar.

As of the time of this article, Celsius stock is up over 350% in the last three years, and well over 30,000% in the last decade. Unsurprisingly, the company's primary outside investor made a return of over $1 billion.

Image source: Getty Images.

To infinity and beyond?

To get a sense of Celsius' astronomical growth, let's take a look at how revenue has changed over the years.

Data source: SEC Filings.

Celsius is consistently growing its top line in excess of 100% per year. And as a reminder, Celsius is selling energy drinks. This type of growth typically mimics that of emerging technology or pharmaceutical breakthroughs, not food and beverage companies. In addition to its strong relationships with top distributors, Celsius markets its energy drinks much differently than the competition. More specifically, Celsius offers a variety of flavors using different fruits and even green tea. Unlike other prominent energy drink brands, Celsius is tapping into broader movements such as health and wellness, which really entices its consumer base. The combination of the distribution deals and creating a healthier alternative to the competition has allowed the company to start generating exponential growth -- and it doesn't seem to be stopping anytime soon.

Through the first nine months of 2023, Celsius has already generated $970 million in revenue -- 48% more than the entirety of 2022. It's obvious by now that Celsius has been able to buck broader themes in the macroeconomic environment. This is no small feat considering tangential consumer discretionary brands are struggling to entice buyers impacted by inflation and high interest rates.

But as I often write, the income statement contains far more information than just revenue. Investors might think that Celsius is paying top dollar to market its drinks and acquire premium shelf space over its legacy competitors. While this is an important point, there is more to uncover.

Last year, beverage and snack company PepsiCo acquired a minority equity stake in Celsius after it invested $550 million into the energy drink company. Given PepsiCo's large portfolio of drink brands, the transaction isn't entirely surprising. The underlying benefit of the partnership is that Celsius was able to strengthen its distribution channels. Today, Celsius sells its products in convenience and grocery stores, big box retailers, online, and even in gyms. Some of the company's retail sources include Kroger, CVS, Target, Walmart, Costco Wholesale, and Planet Fitness.

The relationship with PepsiCo has helped Celsius penetrate brick-and-mortar locations more deeply, which has directly impacted the company's explosive revenue growth. Moreover, given the terms of the PepsiCo deal, Celsius has been able to sever ties with former distribution partners, allowing the company to better allocate capital, according to management. This dynamic can easily be seen in Celsius' profitability profile.

For the quarter ended Sept. 30, Celsius reported net income of $70.5 million. By contrast, the company reported a net loss of $186 million in the same period in 2022. During the earnings call, management explained the return to profitability by stating, "The prior year losses were preliminarily driven by termination expenses as we moved from our prior distribution network to the PepsiCo distribution system."

With such robust revenue growth and a return to profitability, it's becoming more clear why the stock has performed so well. The last stage of this investigation is going to be a hard look at valuation, and assessing if Celsius is worth the premium.

Should you invest in Celsius stock?

CELH PE Ratio (Forward) data by YCharts

The chart above benchmarks Celsius against a cohort of other energy and specialty drink companies on a forward price-to-earnings (P/E) basis. Investors can see that Celsius' forward P/E of 66 is far and away the highest among these companies. However, I'd argue that the premium is warranted.

For starters, take a look at the table below and check out the consensus revenue growth projections for 2024.

Data source: Yahoo! Finance.

The clear takeaway is that Wall Street is betting that Celsius will continue to grow at a pace well above its peers. But one of the bigger ideas here is how quickly Celsius is growing relative to Monster Beverage in particular. As it stands today, Red Bull and Monster Beverage are the two largest energy drink brands in the U.S. with a combined 70% market share, per Statista. The Statista analysis is based on revenue, and estimates that Celsius' market share is roughly 6%. However, other market studies suggest that Celsius has closer to 10% market share. Of note, there are different ways by which market share can be calculated for food and beverage businesses, with revenue being just one metric. But in any case, the consensus is that Celsius is the No. 3 player in energy drinks behind Red Bull and Monster, and that the market is expected to continue growing.

The last thing to consider is Celsius' stock price, especially after the company recently completed a 3-for-1 stock split. A stock split, as the name implies, spits each existing share into multiple ones to lower the per-share price without affecting the market capitalization or any investor's stake in the business. For this reason, current holders of the stock won't see any additional value from their holdings despite having more shares. The rationale behind a stock split is often to increase liquidity in trading volume or to make its stock more suitable for indices.

Given Celsius' meteoric rise and its projected future growth, it's not unreasonable to think that the company could continue gaining momentum against its bigger competitors. More specifically, given the doors PepsiCo has opened for Celsius, the company could be on its way to making a splash overseas sooner rather than later. While there will likely be some increased volatility in the short term due to the stock split, my stance is that Celsius is very much worth buying today.

The most prudent strategy is to dollar-cost average into a long-term position over time. Investors should remain keenly aware of the company's revenue growth and the consistency of profit generation. Should Celsius continue to gain steam here in the U.S. and experience new growth overseas as the PepsiCo partnership continues to bloom, the sky really does seem like the limit.