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Investing in stocks often evokes strong emotions, given the financial stakes involved. However, it’s crucial for investors to evaluate a company’s core potential objectively when deciding to buy or sell its shares. This method helps investors steer clear of being influenced by factors like news reports or short-term price fluctuations.
Analyzing Celsius Holdings
A prime example of the benefits of this analytical approach is Celsius Holdings (-1.49%), whose stock price reached nearly $100 earlier this year before plummeting by about 64%. This dramatic shift prompts a critical question: Is this a warning sign or a buying opportunity?
Rapid Growth with Deceleration
Founded in 2004, Celsius Holdings produces energy drinks, marketing them as fitness beverages with ingredients like green tea and ginger, while minimizing artificial additives. These drinks have gained consumer favor, resulting in swift sales growth. A pivotal moment came in 2022 when Celsius secured a domestic distribution deal with PepsiCo, which extended to Canada by the year’s end.
In 2007, Celsius reported $1.6 million in revenue; by last year, this figure had surged to $1.3 billion, with earnings of $0.79 per diluted share. Between 2022 and 2023, aided by the PepsiCo partnership, revenues doubled.
Opportunities and Challenges
Despite a deceleration in growth during 2024, Celsius’s second-quarter revenue rose 23% year over year to $402 million, and earnings climbed 65% to $0.28 per diluted share. By mid-July, Celsius’s market share in the energy drink sector had grown by 1.4 percentage points to 11%.
Celsius is actively pursuing international expansion, with promising initial results. In the latest quarter, international sales grew by 30%, driven by entry into markets like Canada, the UK, and Ireland. Plans are underway to launch in Australia, New Zealand, and France this year. However, international sales only contributed $19.6 million, or 5%, to the total revenue in Q2.
Nevertheless, the path forward is fraught with potential hurdles. The beverage industry, particularly energy drinks, is notoriously unpredictable. Current trends favor energy drinks over carbonated beverages, often due to perceived health benefits. However, these trends can shift rapidly, and new products may emerge as consumer favorites. For instance, Monster Beverage once experienced significant growth but recently reported only a 2.5% revenue increase in the second quarter.
The PepsiCo agreement has significantly bolstered Celsius financially, with Pepsi’s wholesale purchases constituting over 59% of Celsius’s 2023 revenue. This dependence makes Celsius vulnerable to changes in that channel. After the second quarter, management noted that Pepsi was reducing orders due to excess inventory of Celsius products. Other substantial customers include Costco Wholesale (NASDAQ: COST) and Amazon (NASDAQ: AMZN), representing 12% and 7.6% of revenue, respectively.
The Investment Decision
Despite a 38% drop in share price since the beginning of the year, Celsius’s stock maintains a high price-to-earnings (P/E) ratio of 33, down from over 100 earlier in the year but still above the S&P 500’s ratio of 29. This indicates that the stock is priced for continuous rapid growth. However, with Pepsi reducing orders, future sales growth might decelerate, potentially affecting the share price further.
At this juncture, I would advise against purchasing the shares. Long-term investors might consider holding onto their shares due to Celsius’s growth potential, especially internationally. However, it’s essential to monitor evolving trends closely.
Seizing Lucrative Opportunities
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See 3 “Double Down” stocks ›
*Stock Advisor returns as of 09/19/2024
