NVO - Celsius: Ride The Weight Loss Drug Hype

2023-12-15 11:34:09 ET

Summary

• Celsius Holdings is a company that specializes in fitness drinks and is tapping into the health-conscious trend.
• The company's latest quarterly report shows strong financial performance, with a significant increase in revenue and net income.
• The growing adoption of GLP-1 weight loss drugs presents a unique investment opportunity for Celsius and other energy drink companies.

Investment Thesis

In my analysis, I've looked at Celsius Holdings (CELH) from multiple angles and I'm intrigued by what I see. The company isn't just selling energy drinks; it's tapping into a health-conscious wave that's sweeping the globe. Their commitment to science-backed benefits aligns perfectly with a growing trend in consumer behavior. Throughout this article, you'll find that I'm both optimistic about Celsius' financials, which are strong, and their strategic position in a country that looks poised for wider adoption of GLP-1 drugs.

Introduction

Celsius Holdings specializes in fitness drinks under the Celsius brand. These beverages are designed for health-conscious consumers, offering energy-boosting benefits with a focus on wellness. The company claims its drinks are clinically proven to accelerate metabolism and burn body fat when combined with exercise. The product range includes various flavors, formulated without artificial preservatives and flavors, and enriched with vitamins and minerals. Celsius products are available in both retail stores and online, catering to the growing demand for functional beverages that support a healthy lifestyle.

Latest Quarterly Report

In my opinion, Celsius Holdings' third-quarter financial results for 2023 paint a promising picture, reinforcing my strong buy thesis. The company's performance, especially in the context of its rapid growth and strategic alignments, illustrates its strong financial health and encouraging future prospects.

To start with, Celsius' staggering 104% revenue increase to approximately $385 million in Q3 2023, from $188 million in the previous year, is a clear indicator of its growing market presence. This is largely attributed to a 107% increase in North America revenue, which speaks volumes about the brand's acceptance and popularity in a competitive market. The fact that Celsius is driving growth in both dollars and units in the energy category is noteworthy and supports my belief in the company's potential for sustained growth.

The expansion in foodservice channels, particularly in over 2,000 Jersey Mike locations and 3,000 Dunkin' Donuts nationwide, not only diversifies the revenue streams but also enhances brand visibility and accessibility. This strategy taps into new consumer segments, potentially driving further growth.

Moreover, Celsius' impressive performance on online platforms like Amazon, where it leads the energy drink category, is a testament to its strong brand appeal and efficient marketing strategies. The fact that the company is outpacing category growth as the largest and fastest-growing brand on platforms like Instacart further cements its status as a market leader in the digital space.

The financials are equally compelling. A net income of $70.5 million, compared to a net loss in the previous year (due to a one-time termination fee paid to a former distributor), demonstrates the company's successful turnaround and operational efficiency. The improvement in gross margins to approximately 50.4% is indicative of effective cost management and operational leverage, which was primarily due to the efficient use of promotional allowances and effective cost control in raw materials, freight, and scrap rates, enhancing both sales and operational efficiency. Overall, this assists the company's ability to be profitable in the long term.

However, it's important to acknowledge the challenges. The seasonal variability in the energy drink market and the potential for inventory adjustments by key partners like PepsiCo (PEP) could impact short-term revenue. To describe more and for further context , Celsius moved its distribution to PepsiCo in North America, marking a strategic shift from independent Anheuser Busch distributors. PepsiCo invested $550 million in Celsius, signifying a push towards less sugary, more functional beverage offerings. In my opinion, having a partnership with this beverage giant is a foundational element that increases confidence in both shareholders and future investors, but I understand the short-term hurdles. Additionally, Celsius plans to internationally expand, with the help of Pepsi, into the Canadian market first. And within 3 to 5 years Celsius hopes to capitalize on foreign markets by holding large shares of the market in many other countries. Moreover, the company's product innovation is compelling as they just launched Cosmic Vibe, a new fruit punch flavor available at Circle K, and also introduced Celsius Essentials, a fitness-focused beverage line, initially at 7-Eleven with a broader rollout in 2024. These visions and creative techniques will require significant investments and near flawless execution in order to benefit most, but to say the least, Celsius has their foot on the gas.

Nevertheless, the company's strategic partnership with PepsiCo, its expanding product line, and its growing presence in key markets like Canada provide a solid foundation for future growth. The focus on innovative products like the new Celsius Essentials line and expanding in non-traditional channels such as food service demonstrate a clear vision for diversification and market penetration.

In conclusion, Celsius Holdings' strong financial performance, strategic expansions, and innovative product offerings align perfectly with my strong buy thesis. The company's ability to capitalize on global health and wellness trends, coupled with its operational efficiency and market expansion strategies, position it well for sustained growth and profitability. While challenges exist, the potential upside far outweighs them, making Celsius Holdings a compelling investment opportunity.

GLP-1 Drugs Will Fuel Growth in Energy Drinks

In my view, the recent analysis by Stifel , highlighting the potential impact of GLP-1 weight loss drugs on various sectors, especially energy drinks, presents a compelling investment opportunity. The fact that about 15% of U.S. consumers are willing to use these drugs, according to Stifel's surveys, is a significant indicator of their potential widespread adoption. This interest grows to 36% when considering those who are waiting for proven results, wider availability, and FDA approval specifically for weight loss. The approval of drugs like Wegovy and Zepbound from Novo Nordisk (NVO) (NONOF) and Eli Lilly (LLY), respectively, for weight loss further strengthens this thesis.

The expected 4% reduction in calorie intake among U.S. consumers using GLP-1 drugs, as estimated by Stifel, is a key factor here. This reduction, stemming from the appetite-suppressing nature of these drugs, could lead to a noticeable shift in consumer habits and spending. The fact that these drugs work by mimicking stomach hormones to suppress appetite means people might seek other sources of energy, such as energy drinks. This is where we could see Celsius have a surge in demand.

The survey results indicating a 72% higher likelihood of GLP-1 drug users consuming energy drinks at least once a month compared to the general population are particularly striking. This could lead to a 2% increase in U.S. energy drink consumption if even half of those interested in GLP-1 drugs begin taking them, which would also increase revenue for Celsius' peer, Monster Beverage Corporation (MNST). This anticipated growth in energy drink consumption isn't just a short-term spike; it's a fundamental shift in consumer behavior that has long-term implications for these companies.

Overall, the growing adoption and interest of GLP-1 weight loss drugs could significantly reshape consumer habits, leading to increased demand in one of the many sectors such as energy drinks. I believe this presents a unique investment opportunity, as companies in these sectors are poised to benefit from these changing consumer patterns. The insights provided by Stifel offered a strong foundation with which I completely agree, therefore promoting a 'strong buy' in this area. The significance of this trend could greatly impact the market, and as an investor, I would want to be on the green side of this uptake.

Risks: International Adoption and The NCAA

Celsius' expansion efforts outside North America have been less than stellar. Despite their impressive growth in the domestic market, their performance internationally has not mirrored this success. This raises concerns about the company's ability to navigate diverse global markets and consumer preferences. Successful international expansion is crucial for sustained long-term growth, especially in the highly competitive energy drink sector where global presence is often a key indicator of a brand's success. The lack of robust international growth could signal potential limitations in the company's strategy or execution. It also raises questions about Celsius' adaptability and agility in understanding and catering to varied international tastes and market dynamics.

Additionally, the risks associated with Celsius Holdings are multifaceted, notably due to its ingredients being banned by major athletic organizations like the NCAA and the Olympic Committee. The inclusion of substances like ginseng, guarana, L-carnitine, and taurine, which are on the banned substances list, raises serious health concerns. Taurine, in particular, is controversial for its potential to enhance performance but also poses risks to heart health and mental well-being. Additionally, Celsius faced legal challenges in the past for falsely claiming to have no preservatives, specifically citric acid, contradicting its marketing as a healthy choice. The settlement was finalized when Celsius agreed to pay $7.8 million due to this situation. However, in a report by Statista's Consumer Market Outlook, global sales of energy and sports drinks reached around $159 billion in 2021, with projections suggesting a rise to over $233 billion by 2027. So, this projected value of the energy drink industry, could lead to more informed choices by Celsius to capitalize on market share opportunities in the future. But for the most part, I believe these risks affect the company only minorly when viewing the bigger picture as a whole.

Is This A Value Play?

When we look at valuation metrics, it's essential to understand the overarching picture within the company regarding its current market position and growth potential. Celsius has rallied for the past 4 years and is now up +3,200% since then (round of applause to the early buyers). As we can tell, this is quite the growth story and with the catalysts we discussed above, I don't see the stock stopping anytime soon. So to answer the question, this is not a value play whatsoever, it's an intelligent momentum/growth choice. With that context, I will start with the forward Price-to-Earnings (P/E) ratio, which stands at a striking 65.59 , far exceeding the sector median by 251%. This might initially raise eyebrows, but like I said context is critical. The 'F' grade assigned by Seeking Alpha should be digested with a grain of salt. In high-growth sectors, a hefty P/E can indicate investor confidence in future earnings. This metric doesn't stand alone but works well with other indicators to form a complete picture.

Moving on to the forward Price to Sales (P/S) ratio, we have a more grounded figure of 9.04 . This is a significant number as it suggests the company is being valued at just over nine times its sales. Compare this to the sector's median (over by 685%), and we find a story of anticipated growth that may not yet be reflected in sales figures but is nonetheless expected by the market. The 'F' grade here should be interpreted as an aggressive bet by the market on the company's capacity to convert sales into a more robust bottom line.

Lastly, the forward Price to Book (P/B) ratio sits at 48.47 . This metric, often overlooked, tells us how much investors are willing to pay for the net assets of a company. A high P/B ratio like this one could imply that the market foresees a significant value creation that is not captured by the book value of the company's assets. In other words, investors may be seeing something on the horizon that promises to substantially increase the company's value.

If we look at the Seeking Alpha Quant Rating I have provided below, we understand that, based on their analysis, the stock is a hold, which is being calculated at 3.34 . As I look deeper into this though, I think we should discover how this rating was computed.

Below are the factor grades that are given by the quants. I observe very high grades in nearly every section of consideration, except for valuation, which we now understand why that is. Based on the growth of Celsius, I have reason to believe that we should discount this 'F' grade due to context and find that there is a great opportunity for an investment.

To continue this discussion, I am a fan of analyzing the point and figure chart in the traditional three box reversal method. In the chart below, I would like to direct our attention to the right side of the graph where we can observe that there is a support line at 49.00. Now, if that support is broken there is reason to believe, from a technical perspective, that this stock price could drop much lower than one would like (because there is truly not another support line below the current level). However, as we intertwine our macro catalysts with the current support level, I am confident that Celsius will hold the line and continue to grow, which would suggest that our entry point would be at the bottom (an investor's dream). With support holding, I predict a minimum 10% increase in the stock (returning to a common fluctuation point at approx. $54) as the potential impact of GLP-1 drugs has not yet been priced into the stock (news release was on December 2nd and the stock is down 4.42% since then). Nonetheless, if you are searching for a potentially bottomed-out entry point and a company poised for an upward surge, this could be your opportunity.

In combination, these metrics coupled with the technical analysis paint a picture of explosive growth. The high ratios and the Seeking Alpha grades could be interpreted as warning flags, but I view them as the opposite. I see this more as the market's belief in the company's potential to outperform. For those with a strong conviction in the company's strategic direction, these metrics do not displace my 'strong buy' thesis. Despite the seeming market overvaluation, the growth trajectory from the past I believe is signaled to continue. What's the main idea? These numbers are not just cold hard stats; they're a narrative about future potential, and right now, that narrative looks compelling.

The Ultimate Takeaway

Celsius Holdings stands as a high-growth company, that is gaining market share, in the energy drink landscape. My analysis reveals a company that isn't just riding the wellness wave, but actively shaping it. Their strategic moves, particularly in the face of the GLP-1 drug trend, position them at the forefront of an industry on the cusp of transformation. While acknowledging the risks, my conviction remains unshaken. I see a company taking the right steps for success: innovation, market savvy, and a unique focus on health. Celsius isn't just another stock pick - it's a forward-thinking choice for various types of investors ready to tap into solid upside.

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