2023-10-23 03:30:03 ET
Summary
- Celsius has seen a strong stock market performance, returning over 3970% in the last 5 years.
- The company's success is partly due to its strong management and trending products, offering drinks with vitamins, BCAAs, and caffeine.
- Celsius is growing exceptionally fast, with sales increasing by 112% in the last quarter, and has a long-term distribution agreement with Pepsi.
- The stock price seems seasonal, but at different times.
Introduction
What fascinates me is the strong stock market performance of Celsius ( CELH ). The stock has returned over 3970% (your initial investment 40.7x) over the last 5 years. Look at the graph below. Its returns are much, much higher than Monster Beverage ( MNST ) and the S&P 500.
What's the secret? Is it their strong earnings growth? Sales growth? Capital allocation? Well.. Is partly due to their strong management and trending products. Celsius sells drinks that are popular among athletes, bodybuilders, and also regular consumers. Their drinks are filled with vitamins, BCAAs, caffeine and other nutrients that help muscles recover faster.
Celsius offers a variety of fruity flavors such as: sparkling grapefruit, cucumber lime and many more. Monster Beverage and Red Bull don't offer those fruity flavors. Moreover, Celsius has no direct competitor. Monster Beverage and Red Bull offer caffeinated energy drinks, but without BCAAs.
BCAAs are amino acids found in protein-rich foods such as eggs, meat and dairy products. They stimulate muscle growth by initiating protein production (to repair muscles). BCAAs also reduce muscle soreness, making it a perfect candidate for athletes and bodybuilders.
Although there are drinks that offer BCAAs, the combination of caffeine and BCAAs in sports drinks is not common. Celsius BCAA+ energy drink offers a unique product that suits athletes well. The products are sold through distributors, a variety of retailers, e-commerce and of course, health clubs, gyms and the military.
Seasonality Affects The Stock Price
With just $654 million in revenue in 2022 (up 108% year-over-year), Celsius is still small compared to Monster Beverage with $6.3 billion in revenue. So Celsius has a lot of room to grow.
Both are trending energy drinks, and Monster Beverage is also still in the growth phase. Monster's revenue is expected to increase by 10% in the coming years. Celsius is expected to increase its revenue by 90% next year.
It seems that this drink is becoming more and more popular. Google Trends shows that recently more and more people are searching for 'Celsius drink'. The most searches were conducted in January 2023. We see that there is a seasonal trend: after the summer months, fewer people look for Celsius drinks. But after New Year's the drink becomes interesting again. Are people unmotivated to exercise after the summer? And are they interested again after New Year's? Who knows.
Celsius Popularity Over Time (Google Trends)
So now we know that popularity is seasonal. The stock price also seems seasonal, but at different times. It usually declines during the first month of the year until April. Then it shoots up from May to November. After that, the share price will be under further pressure in the coming months.
It therefore appears that the worst time to buy stocks is the third and fourth quarters of the year. We see some good buying moments at the end of April/beginning of May (based on the past 5 years).
Celsius Stock Price (Seeking Alpha)
Seasonal influences certainly seem to play a role in the purchasing process. We're now in the fourth quarter of the year, so historically this doesn't seem like a good time to buy the stock.
Although over a longer period of time I don't believe the time of year matters in the purchasing decision. Growth factors and stock valuation are more valuable to me when making the purchasing decision. And when you buy a stock, usually hold it for at least 3 to 5 years. The profit after capital gains taxes is not worth the risks.
Celsius Is Growing Exceptionally Fast
Celsius is growing exceptionally fast. Sales increased by 112% last quarter compared to the quarter a year ago. And the Pepsi distribution deal in August 2022 will allow Celsius to accelerate sales internationally. Pepsi invested $550 million in Celsius (convertible preferred stock, representing 8.5% ownership) as part of a long-term distribution agreement. Pepsi has become the preferred distribution partner for Celsius worldwide.
Historically, much of growth is financed by profits and almost all of the cash is invested in expanding the business. Celsius is cash rich, just like Monster Beverage. Total cash and short-term investments totaled $681 million, and there are no debts on the balance sheet. This makes the company resilient to rising interest rates.
Risks To Mention
Earlier I mentioned the seasonality of the stock price during the year. This can be attributed to the insiders selling shares during that period. During the second quarter of 2021, more than 10 insiders sold their shares. And during the second quarter of 2022, 8 insiders sold their shares. A dozen insiders sold shares during the quarter this year. It could be possible that the number of insiders selling shares scared investors and they sold again. But that's speculation. In my opinion, you should think twice after twelve insiders have sold their shares.
Another point to mention is share dilution. While it is completely normal for a growth company to issue shares to finance further growth. I do not favor it because it dilutes the stock, and it can also increase the volatility of the stock price because supply increases. It seems beneficial to issue shares when the valuation is expensive; its cheap capital. But it doesn't add value to shareholders if done when the stock is undervalued.
The last risk we should mention is the large number of shares that were shorted. Many speculators are pessimistic about the company as the float short percentage stands at 34%. This is an alarming amount that does not support a higher share price.
However, this could be a catalyst for the stock price to rise in the short term (short squeeze). We've seen this many times in history, most recently during the GameStop short squeeze in January 2021. At the time, there were too many short sellers and few shares available to buy. As many traders bought call options, demand increased significantly, while supply was greatly reduced by the short sellers. As a result, the share price rose sharply. At that time the percentage of float short was more than 100%. So I don't see this happening with Celsius. However, if the stock rises further, short sellers will close their positions, causing the stock price to rise. It's a nice "free lunch".
Celsius Is Expensive Compared To Its Peer Group
Celsius is debt-free and resilient to rising interest rates, but that doesn't mean its share price is also resilient. When interest rates rise, investors choose safer bonds over equities. Shares are compared to bonds and 'expensive' shares can fall in value.
Celsius is currently an expensive stock with a P/E ratio of 58. It needs to perform consistently to maintain its expensive stock valuation. In an economic downturn, the market could significantly correct the stock price.
The Fed has acted quickly to reduce inflation. As the economy cools, consumers tend to think twice before making a purchase. “ A hard landing is in sight ”. There are many indicators that point to a recession next year. So in my opinion, I think Celsius' stock valuation is on the high side.
Because Celsius invests their profits to grow, the P/S ratio is a useful ratio to understand the valuation compared to the peer group. As we can see, the rating is certainly higher than that of the peer group. But analysts expect strong growth in revenue of more than 30% annually.
P/S Ratio of US beverage companies (Analyst' calculation)
Conclusion
Celsius is a great stock to own if you buy it at a good price. Celsius is growing strongly and has seen its revenue increase by 112% in the last quarter. Their growth is fueled by Pepsi's $550 million investment last year (representing an 8.5% ownership). Celsius invests all its profits in expanding the company. Which has worked quite well.
Celsius focuses on athletes and bodybuilders and offers drinks packed with vitamins, caffeine and BCAAs. These drinks are offered in fruity flavors. And consumers like it. Celsius drinks are becoming increasingly popular worldwide.
The drinks are most popular during the summer months and after New Year's. We also see seasonality in the share price. From this historical perspective, it doesn't seem a good idea to buy the stock now.
However, the company is growing rapidly, and the Pepsi deal could expand its products globally more quickly. Celsius finances its growth with its profits and the company is debt-free. This eliminates the interest rate risk.
While Celsius's strong growth, Pepsi's investments and its debt-free balance sheet are strong positives, there are also some negatives. Twelve insiders sold shares these quarter, and short sellers have taken on a huge position lately. Another point that should be mentioned is the expensive stock valuation and its seasonality. Celsius is certainly a company with strong ambitions, but I think this is not the time to invest. I'm waiting until May before buying shares of this great company!
For further details see:
Celsius: Strong Company But Not The Right Time To Invest