2023-12-11 08:30:00 ET
Summary
- Celsius Holdings is aiming to close in on the market leadership of Monster Beverage and Red Bull in the energy drink market.
- The company achieved a 104% YoY increase in revenue in the third quarter, with solid growth in both the North American and international segments.
- However, the global expansion phase could be more challenging than anticipated, given the high expectations baked into CELH's expensive valuation.
- I argue why, while I've yet to glean a sell signal, late buyers attempting to chase further upside could be set up for a massive reality check.
Celsius Holdings, Inc. ( CELH ) is a leading player in the energy beverage market as it attempts to close in on the market leadership of Monster Beverage ( MNST ) and Red Bull. Accordingly, Monster (37.5% share) and Red Bull (33.8% share) dominate the energy drink market, trumping the 9.3% market share achieved by Celsius Holdings. Despite that, Celsius's achievements from a low single-digit market share shouldn't be understated, as it attempts to disrupt the market.
Celsius also notched a highly impressive third-quarter or FQ3 earnings release in November, posting a 104% YoY increase in revenue. Accordingly, the company delivered a 107% growth in the North American segment. In addition, its international business also saw sales surge by 56% YoY, indicating broad-based growth metrics, bolstering its market share gains.
As a result, Celsius's remarkable operating performance over the past year has also been reflected in CELH's share price. Accordingly, CELH posted a total return of 29.2% over the past year, easily outperforming MNST's 6.2% uptick over the same period. However, investors must ask serious questions about whether they still expect Celsius to post significant gains against the market leaders moving forward as its market share nears double digits.
Seeking Alpha Quant assigns CELH an "F" valuation grade, suggesting it seems significantly overvalued compared to its consumer staples ( XLP ) peers. However, with a best-in-class "A+" growth grade, CELH Bulls could argue that the best is yet to come as Celsius embarks on its international growth journey, bolstered by its distribution partnership with PepsiCo ( PEP ).
Despite that, with CELH valued at a forward normalized earnings multiple of nearly 60x, I'm concerned about whether much of its growth optimism has been priced in. Morgan Stanley ( MS ) analysts cautioned that its valuation could have factored in Celsius reaching " a mid-teens share of the U.S. energy drink category in the next few years." As a result, it could "limit further upside" unless Celsius could snag even greater than anticipated market share against the leading incumbents.
Analysts' estimates suggest that Celsius's revenue growth momentum could slow down significantly over the next three years, behooving caution. Accordingly, while Celsius is projected to deliver nearly 100% in revenue growth for 2023, the growth is expected to normalize to about 31% by 2025. Moreover, its international expansion phase is expected to be more challenging than its North American opportunities as it navigates different drinking cultures, brand positioning, and intense competition.
Its execution is also critical as Celsius looks to global markets to continue its growth trajectory to justify its expensive valuation. However, the increased execution risks in this growth phase shouldn't be understated. Unanticipated challenges could hamper its growth momentum, hurt investors' expectations, and consequently impact CELH's valuation.
I didn't assess sell signals on CELH's price chart, as it remains in a medium-term uptrend. However, the $70 resistance zone remains in play, with CELH down nearly 25% from its September 2023 highs.
CELH's consolidation has seen dip buyers returning to defend at the $48 level. However, there isn't a clear buy signal that I believe should be capitalized currently, suggesting the risk/reward remains well-balanced, with a view to the downside, given its implied overvaluation.
Therefore, my assessment suggests investors should allow more time to assess the company's forays into the global markets and assess its execution. With its growth expected to normalize over the next two years, holders sitting on substantial gains could seek to cash in if its execution isn't as promising as anticipated.
Rating: Initiate Hold.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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Celsius: A Massive Reality Check Is Well Overdue