Shares of Celsius (CELH -2.49%) are heading in the wrong direction. Since hitting their all-time record high in March, they've fallen a gut-wrenching 66% (as of Sept. 27). Investors aren't as excited as they once were.
But Celsius has still put up an unbelievable return if we zoom out. In the past five years, the beverage stock has soared 2,810%, a gain that is light-years ahead of the S&P 500.
Interested investors could be looking at adding Celsius stock to their portfolios on the dip. But is it too late to buy shares?
Slowing growth
Perhaps the most important factor that helped drive shares higher in the past few years is the company's incredible growth. Celsius' functional and health-focused energy drinks caught on with consumers. Between 2018 and 2023, sales jumped 25-fold from $53 million to over $1.3 billion.
Besides simply getting into more retail locations, like grocery stores, fitness centers, and gas stations, to access more consumer touchpoints, Celsius improved its prospects when it signed a partnership deal with PepsiCo. The snacks and soft drinks giant started handling distribution for Celsius after the agreement started about two years ago.
Celsius' success selling online has also helped. In the latest quarter (Q2 ended June 30), "sales on Amazon increased 41% year over year to $39.9 million," according to CEO John Fieldly.
Investors undoubtedly bid up the stock, believing the monster revenue gains were sustainable. It's easy to extrapolate the recent past, thinking that the growth can continue. But this is almost never the case. And Celsius is proof.
While the nonalcoholic beverage industry overall experiences pretty muted growth, energy drinks were a bright spot. But this could no longer be the case. The energy drink segment saw flat year-over-year unit volume in the second quarter. So, as the calendar turned to 2024, things started to change for Celsius, too. Through the first six months of this year, the company's revenue was up just 29%, down considerably from a 102% rise in 2023.
"The category overall softened in Q2 and has impacted the overall growth trajectory of the category," CFO Jarrod Langhans highlighted on the Q2 earnings call.
Plus, in an effort to manage its inventory surplus, Pepsi is lowering the amount it purchases from Celsius. This is creating another ongoing headwind.
Compelling valuation
In March, shares traded at a price-to-earnings (P/E) ratio of 126. After the stock tanked, it now goes for a P/E multiple of 32. The more depressed valuation can certainly look compelling for prospective investors. Viewed in this light, I can understand if someone wants to initiate a small position in the stock.
However, I'm a bit more critical about the business. One key factor I look for before investing in a company is the presence of a durable competitive advantage, otherwise known as an economic moat. A valid argument can be made that Celsius, while a notable entrant in the beverage industry, hasn't developed a moat.
I'd argue that if rivals instituted greater promotional activity, Celsius customers would easily switch. This could indicate that consumers have much less brand loyalty than perhaps some bulls had previously thought.
I'll gladly pass on the stock. I think long-term investors who also care about owning businesses with an economic moat will probably do the same.
Based on the outsized returns in the past few years, I believe it's too late to buy shares in Celsius. The market has lowered its expectations toward the business now that it's facing a new reality of slower growth. Consequently, I'm not too optimistic about returns going forward being anything to write home about.
