Once-red-hot growth stock Celsius Holdings (CELH +1.95%) has turned ice cold -- falling a painful 73% in just six months. Profits have plummeted, but Celsius continues to take market share and expand its product lineup and global footprint. Let's look at what's driving the steep sell-off. Could the growth stock be worth buying now?
Image source: Getty Images.
Celsius' rise to stardom
In 2022, Celsius landed a distribution agreement with PepsiCo -- giving Celsius a reliable partner and valuable access to new end markets. The partnership helped Celsius disrupt what is arguably the hottest segment of the nonalcoholic ready-to-drink (NRTD) category: energy drinks.
To illustrate just how valuable the category is, consider that Monster Beverage is the No. 2 player behind Red Bull. Yet it has a market capitalization of over $50 billion. For context, Coca-Cola has a market cap of $266 billion -- meaning that if Monster Beverage were part of Coca-Cola, it would probably be the company's second-most-valuable brand (behind only Coke).
A concern with investing in Coca-Cola for the long term is the future of soft drinks and high-sugar juices for health-conscious consumers with changing flavor preferences. Ready-to-drink coffee and tea will always compete on price and taste with made-to-order alternatives. But energy drinks check all the boxes because they offer caffeine and taste and thrive within the ready-to-drink category.
Celsius extended that advantage by marketing sugar-free energy drinks with purported health benefits. In other words, it developed the holy grail of ready-to-drink beverages. It has four product categories and dozens of flavors:
- Flagship sugar-free Celsius drinks are marketed to accelerate metabolism and burn body fat.
- Celsius Vibe has less caffeine and focuses on more exotic flavor profiles.
- Celsius Essentials are for "fitness enthusiasts looking to elevate their performance" and have even more caffeine than the standard line.
- Celsius On-The-Go powder stick packets.
Celsius has done an excellent job creating new flavors, refining its product line, and converting those developments into measurable results. Sales and profits have soared in recent years thanks to higher margins, distribution partnerships, and a global reach extending into Canada, the U.K., Ireland, Australia, New Zealand, and France.
In its third-quarter, Celsius reported that it now has an 11.6% market share in the U.S. energy drink category and a 12.1% market share of retail sales compared to 27.8% for Monster and 36.3% for Red Bull.
Celsius is winning by partnering with the likes of Costco Wholesale and Amazon. Sales to Costco increased by 15% in the recent quarter but fell to Walmart-owned Sam's Club and BJ's Wholesale Club. Total club sales, which refers to wholesale outlets, were $60.5 million in the recent quarter -- nearly 23% of total sales.
Meanwhile, sales to Amazon increased 21% to $27 million -- representing about 10% of total revenue for the quarter. It's interesting that a third of Celsius' sales are through these channels and not conventional grocery stores, convenience stores, drugstores, Walmart, Target, etc.
NASDAQ: CELH
Key Data Points
Celsius' latest quarter was its worst in years
Celsius' stock crashed because its growth rate proved to be unsustainable. To quote the company's third-quarter presentation, "In the past 3 years, Celsius has grown 2.3x more volume than Red Bull, Monster, Alani, and Rockstar combined." Celsius was able to penetrate a highly desirable market while growing sales and profits.
As you can see in the following chart, sales went parabolic, and the company became highly profitable.
But in the recent quarter, Celsius posted zero earnings per share, a lower gross margin, and a 33% decline in North America revenue versus the same quarter last year. Management blamed lower margins because its largest distributor implemented a new supply chain program, so there's reason to believe the slowdown was unfairly amplified. But Celsius isn't providing forward guidance, which isn't exactly a vote of confidence that management has a good handle on where the business is headed.
The valuation is starting to make more sense
The issue with companies like Celsius is that the stock price can swing wildly based on momentum. When Celsius is doubling or tripling revenue in the span of just a few years, then the forecast can go parabolic. But when growth stalls, some investors may value Celsius only for what it is today rather than for where it could be years from now.
Celsius' sell-off was justified because the stock was arguably priced for perfection. But now, Celsius' valuation makes a lot more sense. As mentioned, Celsius has a 12.1% market share of U.S. energy drink retail sales, whereas Monster has a 27.8% share. But Celsius' market cap is now just $6 billion -- over eight times less than Monster. Of course, Monster is a much more global business than Celsius, but still the valuation discrepancy is significant.
Celsius also isn't that expensive for a growth stock. It sports a price-to-earnings ratio of about 36 -- which isn't too expensive considering its recent quarter didn't contribute any earnings. It also has a price-to-sales ratio of just 4.4 -- the lowest in over four years.
Celsius still has plenty of risks worth considering
Celsius is at an uncertain point. In years past, Celsius was taking market share and was the new up-and-coming player in the energy drink category. Now firmly in the No. 3 spot, Celsius has much more to lose. Even if Celsius isn't growing as quickly, investors will expect it to, at the very least, defend its existing market share.
The stock price will likely continue to be highly volatile based on near-term results. Another bad quarter could cast more doubt on the investment thesis and spur a further sell-off. A good quarter could indicate the slip-up was temporary and Celsius is back to growth.
Most investors may prefer a wait-and-see approach to Celsius at this time. But risk-tolerant investors may want to take a closer look, given the valuation is the best it has been in years.
Ultimately, Celsius' long-term success will come down to how consumers receive its products and whether Celsius can convert one-off buyers into repeat customers. (For what it's worth, I've tried Celsius, Monster, and Red Bull, and I think Celsius has by far the best product line.)
If you're serious about investing in Celsius, you may want to consider trying the product, comparing it to alternatives, and looking at how Celsius' beverages are marketed compared to the competition.
