Energy drink stocks have been on a hypercaffeinated roll since Red Bull and Monster Beverage (MNST 0.41%) started dueling around the turn of the millennium. The latest serious contender is Celsius Holdings (CELH 2.12%), a health-focused drink designer with a global distribution deal, skyrocketing sales, and an 8% share of the convenience store and gas station market in North America.

Celsius is participating in a long and heated market battle. Known as Hansen Natural at the time, Monster brewed its first energy drink in April 2002 and has never looked back. The stock has gained a heart-stopping 144,000% since then, turning a hypothetical $350 investment into half a million dollars.

Challengers have come and gone over roughly two decades, but none have had the staying power of Monster and Red Bull. That won't stop even more rivals from entering the ring to capture a respectable slice of that ever-booming energy drink market.

Will Celsius follow in Monster's and Red Bull's red-hot footsteps? From here, Celsius and its stock can go three different ways.

The bull case for Celsius

In a perfect world, the global distribution deal with PepsiCo (PEP -0.62%) sets Celsius up for long-term success. Putting the unfamiliar drink brand in front of billions of consumers, the top-notch distribution network raises awareness of the company's healthier energy drinks. The worldwide interest in organic, low-salt, and vegan foods continues for years and years, further boosting Celsius' growth prospects.

In this scenario, the best is yet to come. The $8.9 billion market cap and $1.3 billion of annual sales you see today could become comparable to Monster's 2023 tally of $53 billion and $7.1 billion, respectively.

Of course, Neither Celsius nor Red Bull will sit on their hands while Celsius rises, so the third-place challenger may still have more catching up to do before truly joining the ruckus at the very top of the energy drink market. Still, history suggests that Celsius might be able to grow both its sales and market value fivefold over the next decade.

Not too shabby, right?

The bear case against Celsius

On the other hand, the bull case assumes that Celsius comes up aces in every challenge along the way. Many things could go horribly wrong instead.

  • Consumer habits are notoriously fickle, and the health craze could very well cool down. That would be terrible news for Celsius, whose entire existence is based on a health-conscious alternative to traditional energy drinks.
  • Or, the health trend could take a sharp turn in the other direction. Imagine a world where consumers turn up their noses on every kind of energy drink, no matter how health-focused it might be. And governments in key markets like the U.S. and Western Europe might consider halting the sales of caffeinated drinks not named coffee, putting up brick walls in front of every growth rocket in this category.
  • Monster is notoriously litigious. The company sued up-and-comer Vital Pharmaceuticals in 2018, collecting enough damages to drive the Bang Energy maker out of business. Then, Monster bought what was left at a pennies-on-the-dollar bankruptcy discount. I don't know whether Monster would have a substantial case for doing the same to Celsius -- and PepsiCo should intervene with its deep pockets and access to high-powered law firms -- but you never know.

I'm not saying that any of these extreme downturns are especially likely, but the risks are real enough. At the very least, challenges like these will probably hold Celsius' skyrocketing growth back a bit.

Realistically, the company should land between these extremes

I may share a first name with innovative physicist Anders Celsius, but that doesn't give me any special insights into our energy-drink namesake's business prospects. In my view, the company faces a promising growth market, but also a couple of powerful rivals and dominant market shares. As a result, Celsius looks like a promising growth stock with a couple of significant headwinds.

Is Celsius a buy with these 10-year prospects?

Investor enthusiasm is also running a bit hotter than I'd like, driving Celsius stock to lofty valuation ratios such as 114 times earnings and 168 times free cash flow. Monster Beverage looks like a bargain by comparison, and true value investors should consider taking part in the Celsius story by investing in distribution partner PepsiCo instead.

So Celsius Holdings is most definitely not every investor's dream stock. You may want to consider a small, speculative stake in this interesting growth story, but only as an extra-small part of a diversified portfolio. Companies heading into direct competition with Monster and Red Bull often fall short of their early goals.