Celsius’s best growth days are probably over. Here is what investors should do now.
Energy drink company Monster Beverage is an all-time great in the investing world; long-term investors have enjoyed life-changing returns, even if the stock was sometimes volatile. Investors are hoping that Celsius Holdings (CELH -0.10%), another energy drink business that has already appreciated more than 21,000% over the past decade, can still pump out big returns.
However, the stock has fallen over 60% this year, causing investors to question whether Celsius’s best investment years are behind it.
So, should investors buy, sell, or hold the stock? The facts answer the question loud and clear.
Celsius’ best growth days are over, but that’s OK
Celsius primarily sells energy drink products aimed at active and health-conscious customers. Celsius products don’t use sugar but include added vitamins and natural supplements.
The company has been around for a while, but the brand’s popularity exploded during the pandemic. Then, in mid-2022, beverage giant PepsiCo announced a $500 million strategic investment that included distribution support, dramatically increasing Celsius’s footprint in stores and other points of sale. This initial jolt from PepsiCo’s support ratcheted up year-over-year revenue growth to over 175% at its peak.
Growth is slowing as time passes. It’s tough topping up such strong growth the following year, and Celsius isn’t exactly small anymore; it’s approaching $1.5 billion in annual revenue:
CELH Revenue (Quarterly YoY Growth) data by YCharts
The slowing pace of growth is likely why the stock has fallen from its peak price. But that’s OK. Second-quarter earnings signal the business is doing fine. Data shows that Celsius contributed 46.5% of the overall growth in the U.S. energy drink market this year, its highest ever. In other words, Celsius is growing faster than the broader energy drink market because it’s taking market share from the competition.
Additionally, Celsius is just starting to grow in international markets, which could eventually drive companywide growth as it matures in the U.S. For example, sales outside North America were under 5% of total sales in Q2. Celsius only launched in Canada in January, and the United Kingdom and Ireland in April. It plans to launch in Australia and France before year-end.
So, while the days of triple-digit revenue growth rates are likely gone, Celsius still has a lot of expansion left ahead.
Are share repurchases on the way?
Celsius has become comfortably profitable and has more than enough cash to invest in growing its worldwide footprint. The business has generated $246 million in free cash flow over the past year, pushing Celsius’s debt-free balance sheet to a cash position of over $900 million. Cash represents more than 10% of the company’s current market cap.
This puts the company in an exciting position.
Management will likely need to decide soon what to do with its growing cash pile. One option could be repurchasing shares, decreasing the share count, thus increasing earnings per share. Share repurchases generally help drive a company’s share price higher over time. Remember, Celsius is still growing sales at a double-digit pace, so the combination could create big returns.
Buy, sell, or hold Celsius stock?
Celsius is probably exiting its phase of life as a young company, but could be entering that sweet spot where it is still growing and profitable enough to share its profits with investors.
At this point, investors can reasonably use earnings to value the stock. Today, Celsius trades at 37 times its estimated 2024 earnings. Meanwhile, analysts expect Celsius to grow earnings by an average of 31% annually for the next three to five years.
This seems realistic if Celsius can maintain 20% annual sales growth or better for the next several years. Sales grew 29% year over year companywide through the first half of 2024, so there is still plenty of sales momentum. The company’s increasing contributions to overall growth in the energy drink category should also give investors confidence that consumers want the Celsius brand.
Assuming this continues and Celsius grows on par with expectations, the stock’s decline has made it appealing. Long-term investors shouldn’t have any problem paying 37 times earnings for a business growing those earnings over 30% annually. That’s a PEG ratio of just 1.2, well within my personal target of 1.5 or less for high-quality stocks.
Sometimes stocks grow unpopular, and the market sells them off. In this case, thank the market for the opportunity to buy Celsius at a price that should make long-term investors happy.
