Celsius's Shares Currently Facing Downturn, Yet Strong Potential for 10-Fold Increase
It's been a tough year for Celsius Holdings (CELH 3.90%), with the share price plummeting over 70% from its peak earlier in the year. The energy drink producer encountered some obstacles recently, but its future looks promising.
Let's delve deeper into why Celsius' stock has been stumbling lately and why it could potentially be a strong investment in the future.
Celsius' current challenges
There are two main reasons that have caused Celsius' stock to falter this year. First, its growth plateaued following the distribution deal it struck with PepsiCo in 2022. This partnership significantly expanded Celsius' presence in the vital convenience store sector, resulting in extraordinary yet short-lived revenue growth throughout 2023. As the company began to surpass these distribution gains, growth inevitably slowed, leading many investors to be taken aback, given their expectations of constant high sales growth. As growth dipped from the 95% reported in the fourth quarter of 2023 to 37% in the first quarter of 2024 and then even further, the stock price dropped.
Meanwhile, as Celsius was on the brink of maximizing its presence within the convenience store sector, convenience stores themselves started to struggle with foot traffic. For instance, large convenience store operator 7-Eleven announced its intention to close over 400 stores due to a 7.3% decrease in traffic in August. The company attributed this decline to consumers being more cautious with their spending due to rising inflation, high-interest rates, and a challenging job market.
Consequently, the energy drink category alone witnessed a mere 1% growth this year, markedly lower than the 8% growth experienced in 2023.
Potential for recovery
Even though Celsius shares have been underperforming, there is hope that they will rebound in the coming year and prove to be a lasting success. For instance, based on information gleaned from the National Association of Convenience Stores conference, retailers and brands predict a recovery in sales for the next year. In the last quarter, the company had to manage inventory misalignments, but this should also soon be rectified.
The brand continues to gain traction with younger consumers, who tend to increase their spending as they age. According to data from a Piper Sandler survey of 13,500 teenagers, Celsius emerged as the top choice for energy drinks, with 35% naming it as their preferred brand. With an overall U.S. market share of around 12%, this leaves plenty of room for Celsius to capture market share from established brands like Red Bull and Monster Beverage (MNST 0.84%), which ranked second in the survey.
In addition, Celsius continues to excel in non-traditional markets, such as Amazon, as well as major retailers and warehouse clubs like Costco Wholesale. It also has a line of new products, Celsius Essentials, which expands into the larger 16-ounce energy drink category. This product line is being marketed with a greater emphasis on performance, aiming to attract more male consumers. The company has reported that sales of this product line have primarily been additive, rather than cannibalistic with regards to its other products.
Another significant opportunity for Celsius lies in international expansion. Last quarter, only 7% of its sales came from markets outside the U.S. and Canada, while Monster's energy drink sales outside these regions represented 38%. This represents a considerable growth potential for Celsius.
Celsius has established itself in some Scandinavian markets, such as Sweden and Finland, but only began selling its products in the U.K. and Ireland in Q2, primarily through gyms and select fitness centers. It has also entered markets like Australia, France, and New Zealand. Monster, meanwhile, has gained a strong foothold in European, Asian, and Latin American markets.
Celsius is currently trading at a forward price-to-earnings (P/E) ratio of about 30 times next year's earnings estimates.
This valuation is not excessive if the company's drinks maintain their popularity with younger demographics and if it can seize the considerable international opportunity before it. Successful international expansion played a significant role in Monster's stock's massive gains, and Celsius is still in the early stages of this opportunity. With a market capitalization of $6.4 billion compared to Monster's $55 billion (as of this writing), Celsius could potentially be on track to multi-fold its value if it can replicate Monster's accomplishments in the beverage category.
Despite Celsius's current challenges, such as a plateaued growth following its PepsiCo partnership and struggles in the convenience store sector due to decreased foot traffic and cautious consumer spending, there's optimism for its future in the finance world. The company's strong predictions for a sales recovery, increasing market share, and successful international expansion indicate potential for its stock to bounce back and become a strong investment. With its popular brand among younger consumers, new product line, and potential for growth in non-traditional markets and international sales, Celsius presents an interesting opportunity for investors looking to invest in the beverage category.
