Celsius (CELH 2.15%) was once on a rocketship to the moon. During the five years leading up to the all-time high they reached in March 2024, shares soared 7,300%. I challenge you to find a business that put up a better return than this during that period.
But what goes up must come down. As of this writing, this beverage stock trades a gut-wrenching 69% below its peak price of nine months ago. Does this make Celsius an incredible buying opportunity right now?
Getting tired
Celsius was once growing at an unbelievable pace. Between 2018 and 2023, revenue surged 25-fold. Though momentum has slowed this year, sales were still up 29% year over year through the first six months of 2024.
However, revenue trends have taken a turn for the worse. In the third quarter, sales tanked 31% year over year. PepsiCo, the drinks and snacks giant that entered into a distribution agreement with Celsius in Aug. 2022, experienced an inventory glut. This resulted in fewer orders, which hurt Celsius' sales.
The silver lining here is that Celsius' revenue dip should be a temporary speedbump. Once the supply chain sorts itself out and Pepsi's order book stabilizes, sales should begin to recover. At least, this is what the bulls are hoping will happen.
NASDAQ: CELH
Key Data Points
Reasons to be bearish
The company's notable revenue slowdown, which may or may not be a near-term phenomenon, still points to a problem with owning Celsius for the long term. There's a valid critique that the business does not possess an economic moat, something that would help defend it against existing rivals and new entrants in the industry.
It's not hard to understand just how competitive this market is. Celsius might have found success targeting the health and wellness segment of the energy drink market, but it can't escape the low barriers to entry as new brands pop up all the time. And from the customer's perspective, there are no switching costs -- people can and do choose to drink whatever they're in the mood for at any given time.
In 2023, Celsius spent 12.1% of its revenue on advertising, higher than the 7.4% of sales that Monster spent on advertising last year. As part of its growth efforts, Celsius has had to dedicate more of its resources to marketing efforts.
Celsius' distribution deal with Pepsi might be a net positive that gives it access to untapped markets, but investors need to realize the latter has other energy drink brands in its portfolio, such as Mountain Dew products and Rockstar. This could cause conflicts over strategic focus.
All of this points to what I believe is a difficult road ahead for Celsius. Investors are already seeing this play out right in front of their eyes. In the past several months, the brand has actually lost market share in the sugar-free segment of the broader energy drink category.
Celsius' valuation
The stock might be trading nearly 70% off its peak, but it's no bargain. The current price-to-earnings ratio of 42.6 represents a 68% premium to the S&P 500.
Yes, Celsius still possesses growth potential, but its lack of durable competitive advantages makes it easy to worry the company's industry positioning will constantly be under threat. So, as beaten down as the stock may be, it's not a stock investors should be rushing to buy right now.
If Celsius can begin to bring back the growth, market share gains, and rising margins that lifted its stock in previous years, the bull case will be a bit more compelling.
