Celsius Holdings' (CELH 2.12%) shares have soared 3,900% over the past five years as it dazzled investors with its explosive growth. From 2018 to 2022, the energy drink maker's revenue grew at a compound annual growth rate (CAGR) of 88%. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive in 2019 and increased at a CAGR of 160% over the following three years.
Analysts expect Celsius' revenue and adjusted EBITDA to have risen 99% and 295%, respectively, in 2023 when it posts its full-year earnings report in March. Those growth rates are incredible, yet its stock still trades 22% below its all-time high of $68.42 per share from last September. I believe that pullback represents a compelling buying opportunity, for three simple reasons.
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1. It's disrupting the energy-drink market
Celsius is carving out its own niche with sugar-free energy drinks that blend natural ingredients such as green tea, ginger, and amino acids with vitamins and a dose of caffeine. It also claims its drinks have "thermogenic" properties that are "clinically proven to accelerate metabolism and burn body fat" while exercising.
That health-conscious approach enabled Celsius to become the third largest energy-drink brand in America, after Red Bull and Monster Beverage. Its new U.S. distribution partnership with PepsiCo, which launched in August 2022, should further expand that reach. PepsiCo invested $550 million in Celsius as part of that deal.
Celsius' popularity among younger American consumers is also climbing. According to Piper Sandler's latest semiannual Taking Stock With Teens survey, 16% of respondents chose Celsius as their favorite energy drink -- which was much higher than its estimated U.S. market share of 10%. According to Stackline, Celsius overtook Monster and Red Bull as the best-selling energy drink on Amazon's U.S. marketplace the third quarter of 2023, with a 21.4% share.
2. Its margin is improving
Celsius' gross margin declined from 46.6% in 2020 to 40.8% in 2021 as it grappled with rising raw-material costs, higher freight costs, and other inflationary headwinds. Its adjusted EBITDA margin also dropped from 12.7% to 10.7%.
But in 2022, its gross margin rose to 41.4% as its adjusted EBITDA expanded to 10.9%. It turned unprofitable that year on the basis of generally accepted accounting principles (GAAP), but it was the result of the payment of a one-time termination fee to its previous North American distribution partner to shift its distribution channels to PepsiCo.
In the first nine months of 2023, Celsius' gross margin rose to 48.3%, its adjusted EBITDA margin jumped to 23.7%, and it returned to GAAP profitability as it benefited from lower costs, its improved scale, and other operational efficiencies.
3. Its overseas business is booming
Celsius still generated 96% of its revenue from North America in the first nine months of 2023. That segment's revenue soared 108% year over year during the period, as its partnership with PepsiCo expanded its market presence.
However, Celsius' international revenue also jumped 46% year over year in the first nine months of the year as it rolled out its drinks in new markets. That growth was mainly driven by its expansion in Asia, which offset its slower growth in Europe.
Celsius expects to work with PepsiCo to map out its international expansion over the next three to five years. If it can replicate its success in the U.S. across more higher-growth overseas markets, sales and profit could skyrocket.
4. Its stock still looks reasonably valued
From 2022 to 2025, analysts expect Celsius' revenue to grow at a CAGR of 53% as its adjusted EBITDA increases at a CAGR of 91%. That would represent a deceleration from its previous three years of feverish growth, but it would still be one of the fastest-growing beverage companies in the world.
Based on those estimates and its enterprise value of $12.5 billion, Celsius' stock still looks reasonably valued relative to its growth at seven times next year's sales, 33 times its adjusted EBITDA, and 53 times its forward GAAP earnings. It's not a screaming bargain yet, but it still has plenty of room to run before it's considered overvalued.
It's a potential multibagger
The bears argue that Celsius doesn't have much of a moat and could fizzle out if Red Bull and Monster launch healthier energy drinks. However, its support from PepsiCo, growing brand awareness, and warm overseas reception all suggest it has plenty of staying power. Therefore, I believe Celsius could still generate more multibagger gains over the next few years.
