One of the most underrated trends of the last few decades is the rise of energy and sports drinks. People looking for that daily energy boost -- especially younger people -- are turning to carbonated energy drinks like Red Bull over soda, coffee, and tea.
This trend is predicted to only continue with analysts expecting the global energy and sports drink market to hit $233 billion in annual spending by 2027, up from $159 billion in 2021.
Monster Beverage has been one of the big beneficiaries of this trend as the owner of one of the leading energy drink brands worldwide.
Aptly named, the company has produced monster returns for shareholders. Since the mid-1990s, shares have risen by over 150,000%, absolutely crushing the broad market over that time frame.
But there is a new entrant to the energy drink industry, and it has started to take market share from the likes of Monster Beverage and Red Bull. Enter Celsius Holdings (CELH 2.12%), the third-largest but fastest-growing energy drink brand in the United States. Its stock is up close to 5,000% in the last five years, handily outperforming both Monster and the S&P 500.
Data by YCharts.
In 2023 alone, Celsius stock was up 57%. Is this explosive growth stock set to crush the market again in 2024? Let's investigate further.
Fast growth and margin expansion
The key driver behind Celsius stock's gains has been explosive revenue growth. The company has found a perfect niche with a health-focused energy drink brand, positioning itself as a superior product for people who care about exercise and nutrition.
Third-quarter sales were up 104% year over year to $385 million with over $1.1 billion in revenue generated over the past 12 months. Remarkably, five years ago, Celsius's trailing-12-month revenue was just $55 million. As you can see, its brand has caught fire, especially in North America, which is the source of over 95% of the company's sales.
With this increasing scale, Celsius has shown some impressive margin expansion. Through the first three quarters of 2023, gross margin climbed 780 basis points to 48.1% with the most recent quarter hitting an all-time high of 50.4%. With increasing leverage on its overhead costs and expanding gross margins, Celsius should be able to expand its bottom-line net margin at an impressive clip, as long as revenue keeps growing quickly.
Can PepsiCo help it go global?
Even with this impressive growth, Celsius is still significantly smaller than rival Monster Beverage, which reported $6.9 billion in trailing-12-month revenue. Monster is a global brand, while Celsius has mainly been a phenomenon in North America.
Going global with a packaged-goods brand is complicated. Luckily, Celsius has a new partner in PepsiCo to help with global distribution.
In exchange for a minority stake in Celsius, Pepsi now carries Celsius products as part of its massive distribution network, helping the smaller brand expand both at home and abroad. Importantly, this can get Celsius in prime slots at convenience stores and other shops that sell energy drinks, which is typically an advantage that incumbents like Red Bull have.
Celsius's international revenue grew 56% year over year in the third quarter. Investors should expect this rapid growth to continue or even accelerate thanks to the PepsiCo partnership.
What really matters with Celsius stock
If Celsius keeps beating analyst expectations and growing revenue at a triple-digit pace, the stock will likely do well again in 2024. It's hard to be bearish when revenue is doubling every year.
But smart investors know the long-term story is what matters. Buyers of Celsius stock need to evaluate the business looking out at least three to five years. The stock's current market capitalization of $13.9 billion gives it a price-to-sales multiple of 12.3. That premium valuation might immediately scare some investors away, but this is a company that's likely to double or triple its revenue over the next couple of years while expanding its margins as well. That explains why it's forward-looking valuation metrics are much more reasonable with shares trading at 40 times earnings and 6 times sales.
Of course, Celsius isn't guaranteed to keep growing at its current pace, but the company only seems to be building momentum thanks to its growing reach in the strong market for energy drinks.
It's hard to predict whether Celsius stock will crush the market again in 2024, but I expect it to be a winning stock over the next five years and beyond.
