Anticipation: One Growth Stock Prepared for a Rebound in the Coming Year
Celsius Holdings (CELH 1.74%) has experienced a 50% decrease this year and is nearing a 70% drop from its all-time highs set in May. The energy drink brand has been a standout performer since the 2020 pandemic, with shares increasing over 2,000% since March 2020, equating to approximately a 20x increase in less than five years. This impressive performance has positioned Celsius as one of the stock market's top performers over the past few years.
However, the initial optimism surrounding the stock has given way to pessimism, as Celsius has experienced a significant revenue decline and even reported a year-over-year decrease in the last quarter. This shift in sentiment may be exaggerated, potentially presenting an investing opportunity. Here's why growth stock Celsius Holdings is anticipated to rebound in 2025.
Challenging revenue decrease
Celsius' success in offering a sugar-free energy drink led to a shift in consumer preferences within the sector. Traditionally, energy drinks such as Red Bull and Monster Energy had a reputation associated with extreme sports, construction workers, and partygoers. While many consumers consumed energy drinks, this was the prevailing narrative.
Celsius challenged this narrative by targeting its sugar-free energy drink towards fitness enthusiasts, athletes, and women, which proved to be a highly effective strategy, aiding in the expansion of the category and the transition to sugar-free beverages. Today, more than half of all energy drinks in the United States are sugar-free, and Celsius generates over $1 billion in annual revenue.
To secure nationwide distribution, Celsius partnered with PepsiCo in 2022. Pepsi now serves as Celsius' national distributor, providing the brand with better shelf space to compete with Red Bull and more established players. At the beginning of the partnership, Celsius reported strong year-over-year revenue growth, prompting Pepsi to order even more inventory to ensure that stores were continually stocked with Celsius products. By 2024, however, Pepsi recognized that it had ordered excess inventory and began to slow down its ordering to balance supply and demand.
Sales in the United States continued to grow among Celsius customers, but this decrease in orders from Pepsi has caused Celsius's revenue to temporarily dip. Revenue fell 33% year over year in North America last quarter. This decline has been largely responsible for Celsius's stock downturn, but it is a short-term phenomenon. The brand still maintains a 12% market share in North America, according to third-party estimates.
Betting on international expansion
The growth that Celsius has experienced over the past decade has primarily been driven by North America. The brand went from virtually no market share to over 10%, which is why annual revenue now exceeds $1 billion. Although energy drink sales in its domestic market are still expected to grow, investors should not anticipate explosive growth from this market anymore, given its current size.
International revenue represents the key to the next chapter of Celsius' growth story. The company has recently begun expanding into Western Europe, Australia, and New Zealand, which collectively have populations similar to the United States. International revenue currently only amounted to $18.6 million in the last quarter and constitutes a small fraction of Celsius' overall revenue. If the brand can achieve success using the same strategies that worked in the United States, I believe that Celsius will be well on its way to doubling or tripling its sales within the next five to ten years. If we add in Latin America, the Middle East, and Asia, there is still enormous potential for Celsius in the years to come.
The recovery of growth will boost the stock
Growth stocks perform well when they report strong revenue growth. This is crucial for Celsius to recover in 2025, and I believe this is achievable given the revenue dynamics discussed above.
In the long term, earnings growth will drive the share price higher. Currently, Celsius trades at a price-to-earnings ratio (P/E) of around 40, which may seem expensive but is one of its most affordable levels in years. The stock has a market cap of $6.9 billion at this moment. If revenue expands to $3 billion within a few years and the brand manages to close in on Monster Beverage's EBIT margin of 27%, then Celsius will be generating $810 million in annual earnings before taxes, which will likely translate to around $700 million in earnings after taxes.
This translates to a P/E of 10, which is significantly lower than the stock's current market cap. I believe that a growth stock such as Celsius deserves a higher earnings multiple than this, implying that the stock will be a good investment for those who purchase it now as long as revenue and earnings start to grow again.
Investors who see the temporary revenue dip in Celsius as an opportunity for growth might consider investing more money in CELH. The company's focus on international expansion, particularly in markets like Western Europe, Australia, and New Zealand, could significantly boost its revenue in the future.
The recovery of Celsius's growth would positively impact its stock price. As the company achieves strong revenue growth and approaches Monster Beverage's EBIT margin, its earnings before taxes could increase, potentially leading to a more attractive price-to-earnings ratio, making CELH a potential lucrative investment for investors.
