Celsius Holdings’ (NASDAQ: CELH) energy drink has become extremely popular in recent years. The company’s skyrocketing sales growth was noticeable PepsiCoattention from ‘s, leading to an investment and distribution partnership and sizzling investment returns for shareholders. Celsius has lost some of its luster this year, however. The stock is now down as much as 66% from its peak.
No stock rises forever. The question is whether investors should buy the dip or if Celsius’s time in the sun is over.
A sharp drop can completely change a stock’s outlook. Here’s why Celsius fell and why investors should consider buying the stock now.
Reset expectations
Celsius’ energy drink products have enjoyed viral popularity since the COVID-19 pandemic. The brand appeals to young and health-conscious consumers with its “Live Fit” marketing angle. Sales growth accelerated to over 50% year-over-year in the early days of the pandemic, and peaked when PepsiCo entered the picture in 2022.
PepsiCo has become Celsius’ primary distribution partner, giving it access to more outlets and helping Celsius launch into new markets. Year-over-year revenue growth peaked at more than 175%. But with high growth comes high expectations. Celsius’ price-to-sales ratio (P/S) jumped to 17, more than double that of its main competitor, Monster Potion.
As you can see above, growth rates have slowed dramatically. Not only is triple-digit growth a tough next step, but PepsiCo’s initial push to replenish inventory actually pulled some growth forward. In its Q2 earnings call, management noted that PepsiCo’s inventory moves created a $20 million to $30 million headwind during the quarter. Celsius is a much larger company today, with $1.5 billion in annual sales; it’s unlikely to see triple-digit revenue growth again.
In other words, the market has adjusted its expectations (valuation) for Celsius to a new reality of slower growth.
Looking ahead
Celsius isn’t done growing just because it’s not growing at 100% anymore. The company’s $402 million in Q2 revenue was still up 23% from the prior year. Add in the $20 million to $30 million headwind from PepsiCo’s inventory, and growth would have been at least 5 percentage points higher. There are two takeaways here for investors.
First, Celsius is still taking market share from the competition. The company’s North American sales grew 23% year-on-year in Q2. The energy drink market isn’t growing that fast; according to Mordor Intelligence, the North American energy drink market will grow by a low single-digit percentage through 2030. Mathematically, Celsius’ growth comes from somewhere. Monster Beverage is a top competitor and North American sales grew just 3% year-over-year in Q2. Celsius is likely to outperform other brands.
Second, Celsius’ international growth story is still in its infancy. Success is not a given, but PepsiCo’s distribution support will help significantly. International sales grew 30% year-over-year in Q2, but represented just 5% of total sales, so it’s not game-changing. Celsius launched in six new countries this year; the international growth story could become more important over time.
There is no reason why Celsius cannot maintain double-digit revenue growth for the foreseeable future.
Assessing the stock’s long-term potential
If so, investors can expect high investment returns.
Despite the fact that sales are growing much faster than Monster, the stock is cheaper than Monster:
Celsius is profitable under generally accepted accounting principles (GAAP) with similar profit margins to Monster, so it’s hard to argue that Celsius’s sales aren’t as “high-quality” as Monster’s and therefore deserve a lower valuation. Instead, it appears that Celsius’s stock is oversold and mispriced relative to its peers. The stock doesn’t need a higher P/S ratio if it continues to grow sales at double-digit rates; that growth alone would drive the stock higher over time.
Investors shouldn’t let negative price action tell the story for Celsius stock. The company is doing well, and the stock’s valuation more than compensates for slower growth over the long term. The stock wasn’t a great buy at its peak, but it’s an attractive investment idea today.
Should You Invest $1,000 in Celsius Now?
Before buying Celsius stock, you should consider the following:
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius and Monster Beverage. The Motley Fool has a disclosure policy.
1 Growth Stock Drops 66% to Buy Now was originally published by The Motley Fool
