The energy drink space is large and filled with many novice players. One of these has come to the fore in recent years Celsius (NASDAQ: CELH). The company was able to differentiate itself in the crowded space by making its range sugar-free and claiming its drinks are thermogenic, allowing drinkers to burn calories even at rest.
In short, Celsius has quickly skyrocketed to third place in the US energy drink industry in terms of market share, behind only Red Bull and Monstrous drink.
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It is unclear whether Celsius will ever be able to climb the rankings of this market further; Monster and Red Bull still have a significant lead at the moment. But the company is still gaining market share. According to the third quarter report, management believes it has a 12.1% market share, up from 11.4% earlier this year.
It is here that astute observers might raise their eyebrows. How can Celsius ever gain market share when third quarter sales fell a painful 31% year over year, including a 33% drop in North America?
There is a simple explanation for this apparent contradiction. And the details here can help determine whether Celsius is a stock worth buying after the steep sell-off.
When someone strolls into a supermarket and chooses a can of Celsius over a can of Monster or Red Bull, that’s great for Celsius from a market share perspective: it sold, while the other two did not. But if that consumer walks to the cash register and pays, it does not count as income for Celsius.
Technically, Celsius doesn’t sell drinks to thirsty consumers. Instead, it sells its drinks to distributors, who in turn sell to retailers and consumers. That’s how it works in the consumer packaged goods industry. And normally, sales closely follow final sales to consumers. But sometimes there can be disruption.
In this case, Celsius’ top distributor ordered too much product last year. Now the distributor must correct its inventory levels. As a result, Celsius’s revenue took a hit of more than $100 million from this one partner. And yet, final consumer sales still rose 7% year over year. As this 7% sales growth exceeded industry growth, market share increased even as sales for the company declined.
Imagine if I pitched Celsius stock like this: “Celsius stock is down more than 70% from its all-time high, and revenue is down more than 30% last quarter. Would you want to buy shares? ” Many investors would likely reject the offer. After all, who wants to own shares of a company that is in serious decline?
But if the pitch were rephrased as: “Celsius shares are down more than 70% from their all-time high, but it’s a profitable energy drink company that continues to take market share away from established incumbents like Red Bull and Monster.” buy shares?” Investors could take a closer look at Celsius shares in this case.
The 31% drop in sales is indeed alarming without context. But Celsius’s sales are still rising and increasing its market share. Moreover, the company’s gross margin in the first three quarters of 2024 is 50%, compared to 48% in the same period a year ago. Finally, the country has more than $900 million in cash and equivalents, with no debt. In other words, this is still a strong and growing company.
Furthermore, investors should not underestimate Celsius’s potential for additional growth. References to market share only apply to the American market, and there are still opportunities there. But perhaps the bigger opportunities lie in international markets. International sales made up just 5% of the total in 2024, but have increased 36% year on year as Celsius enters new markets.
As you can see, Celsius’s business is in a much better position for long-term success than what its numbers and share price would lead investors to believe. The problem with the largest distributor will normalize over time, and for this reason this could be a good time to buy Celsius shares.
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Jon Quast has positions in Celsius. The Motley Fool holds positions in and recommends Celsius and Monster Beverage. The Motley Fool has a disclosure policy.
Celsius Continues to Gain Market Share While Revenues Decline: Here’s How That’s Possible originally published by The Motley Fool
