Monster Beverage (NASDAQ:MNST) has built a leading franchise in the energy- drink sector by leveraging rising consumer demand for beverages that can provide a caffeine high without the undesirable high-sugar content of traditional soda.  Anecdotally, kids seem to make up a major subset of the company's customer base, though Monster maintains that it doesn't market directly to them. 

Monster's claim of innocence, though, hasn't stopped various attorney general departments from launching investigations and lawsuits against the company, which generally focus on marketing practices and product formulations. So, with its legal bills cutting into shareholder profits, is Monster a good bet for investors?

What's the value?
Monster was a niche manufacturer of natural flavor sodas, marketed under the Hansen's brand name, prior to launching the Monster energy-drink brand in 2002. Since then, though, the company has ridden the energy-drink craze to a fast growth trajectory, nearly doubling its sales over the past five years. 

The popularity of Monster's core energy-drink franchise has also allowed the company to branch out into related beverage areas, like the protein shake and flavored water product categories through its Muscle Monster and Vidration brands, respectively.

In FY 2013, Monster has continued to grow its top line, albeit at a slower rate than in recent years, reporting a 7.5% overall gain. During the period, the company benefited from solid volume growth domestically as well as from a further expansion of its international footprint, a key area of focus that accounts for almost 23% of total sales. 

On the downside, though, Monster's legal bills and related costs have put a crimp in its operating profitability, leading to flat operating income growth versus the prior-year period.

Is it time to reset expectations?
So far, investors seem to have brushed off Monster's legal entanglements, pushing the company's stock price up a healthy 45% over the past 12 months. However, they might want to reevaluate Monster's growth story given the aggressive mind-set of government watchdogs, especially San Francisco's city attorney general who is leading the charge to change Monster's business practices. 

In addition, investors should likely be cognizant of the rising ambitions of competitors that are aiming to capture a greater share of the sports- and energy- drink categories.

Coca-Cola (NYSE:KO), for one, has been making an aggressive push in the alternative-beverage category lately, as its core soda franchise has been exhibiting weak volume growth, especially in its large North American and European markets. The company has already built up a number of billion-dollar brands in the category, including Powerade and Vitaminwater in the sports drinks and flavored water product areas, respectively. 

Coca-Cola is also in the obviously advantageous position of being Monster's leading distributor, accounting for roughly 29% of Monster's sales. This is a position that it could conceivably use to give preference to in-house brands, like its Nos energy brand.

In FY 2013, Coca-Cola reported generally tepid results, with a slight increase in sales volumes worldwide but flat to negative volume growth in the North American and European segments. On the bright side, though, its non-carbonated still- beverage segment reported a respectable 5% increase in volumes, thanks to higher sales in the alternative-beverage space, of which sports and energy drinks are a key component. 

Given consumer concerns over the healthy impact of sugary carbonated beverages, Coca-Cola is likely to put even more focus and marketing muscle behind its alternative-beverage product lines in coming years, a strategy that will likely put further pressure on Monster's profitability.

Health and wellness retail juggernaut GNC Holdings (NYSE:GNC) also has larger ambitions in the sports and energy-drink product categories, as it hopes to leverage its strong franchise in sports nutrition, an area that accounted for 43% of total sales in its latest fiscal year. 

The company's GNC-branded sports drink has found success in the grocery channel thanks to the company's brand power and an ingredient mix that includes key body-enhancing minerals but excludes any caffeine association, a leading area of focus for government investigations. With plans to ramp up its product line over coming years, GNC looks increasingly like a rising player in the alternative- beverage space, posing an additional threat to Monster's dominance.

The bottom line
Shares of Monster continue to trade at a fairly high level, with its P/E multiple of 36 indicating a healthy level of optimism on the part of investors. Given the fact that Monster generates the lion's share of its sales from its energy-drink segment, though, the company's future growth would likely take a big hit with any required changes to its marketing practices or product formulations. Thus, the rewards definitely do not outweigh the downside risks, and prudent investors should stay away until the dust settles.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.