The internet sector is typically where you can find monster stock market winners. That's why it's a major shocker that a company like Celsius (CELH +4.13%), which sells incredibly popular energy drinks, has seen its shares skyrocket 4,370% in the last five years.
More recently, this beverage stock has kept rewarding shareholders, rising 57% in 2023. Investors are hoping the good times can continue rolling in 2024. As we look ahead, can Celsius rocket higher this year? Let's take a closer look at the business.
Posting unstoppable growth
A business that posts ridiculous investment gains, like Celsius, usually does so on the back of huge growth. In this company's case, revenue in the most recent quarter (Q3 2023, ended Sept. 30) surged 105% year over year to $385 million. And this sales figure is up exponentially from the $17 million reported in the third quarter of 2018.
There are a couple of key reasons for the company's emergence in recent years. For starters, Celsius markets its drinks as healthy alternatives with cleaner ingredients than is typically offered in the industry. Despite claims that may or may not be true, Celsius' cans say the drinks can accelerate metabolism and burn fat. The trend of greater interest in health and wellness also helps.
Management has also done a wonderful job raising the brand's visibility and positioning it into more sales channels. Products can be found in grocery and convenience stores, gas stations, gyms, and even on Amazon, where it's the second-most popular energy drink.
In the back half of 2022, PepsiCo took an ownership stake in Celsius and became its distribution partner both in the U.S. and internationally. Leaning on a beverage and snack giant to help get Celsius products into more consumers' hands seems like a no-brainer strategic move.
NASDAQ: CELH
Key Data Points
Based on a partnership deal like this one, it's no wonder Celsius has been rapidly stealing market share in this particular drink category. Investors have reason to be optimistic this will continue.
What's also encouraging is the bottom-line performance. You usually don't expect a company growing this quickly to post positive earnings. But Celsius registered a net income of $84 million last quarter, a reversal from the net loss of $182 million in Q3 2022. Perhaps the business is on a path to sustainable profitability, which would be great to see.
One reason to be hesitant
The success Celsius has achieved is nothing short of remarkable. However, I just don't feel comfortable with the current price tag. As of this writing, shares are trading hands at a price-to-earnings (P/E) ratio of 123. That's a nosebleed valuation, even when you factor in the company's growth trajectory.
Investors are paying up for lofty expectations, indicating that the stock might be priced for perfection today. This leaves zero margin of safety should Celsius either miss when it reports financial results or when sentiment wanes for whatever reason. In other words, I think there's too much downside risk based on the steep valuation.
Zooming out, tempering expectations, and focusing on an important factor -- the P/E ratio, in this case -- that I believe matters to an investment decision, it's hard for me to want to add Celsius to my portfolio right now with a long-term time horizon. To be fair, the stock's momentum could very well continue throughout 2024, but this is impossible to predict.
Instead, investors should be asking whether the shares make a good investment over the next five years. With this mental framework, I'm not a buyer.
