2024-01-17 16:16:04 ET
Summary
- Celsius Holdings, Inc. has delivered nearly 2000% returns since my initial investment in May 2020.
- Celsius is a healthy energy drink company that has experienced rapid growth and is gaining market share from big guys like Monster and Red Bull.
- Celsius has the potential for further growth, especially with its international expansion and potential new product launches.
Those who follow me closely know that I’ve been a Celsius Holdings, Inc. (CELH) shareholder for quite some time. I made my first purchase of CELH way back in May 2020, which means I’m up almost 2,000% on that first purchase.
Unfortunately, that first purchase was very small; however, over the past ~44 months, I’ve added to my CELH position at least 100 times, which means CELH has become a considerable part of my overall holdings .
In full disclosure, I recently moved 1/3 of my CELH shares into a separate account that I’m planning to leave alone for the next 5+ years because I not only believe in the long-term potential, but selling CELH at these prices would trigger a large taxable gain. I also did this because all of my paid subscribers have access to my current investment portfolio , and I thought it was irresponsible to show my full CELH position; I was fearful that a new subscriber would see my large CELH position and try to copy it without knowing the full backstory. My overall CELH position is very large because I’ve owned it for 3+ years, and I’ve added dozens of times along the way.
Quick Introduction to Celsius
CELH is a healthy energy drink company based in Boca Raton, Florida, that has taken the beverage industry by storm over the past several years. In that description, I used the term “energy drink,” which is more generic. However, the people who know this company best prefer the term “functional beverage,” and if you’re someone like me who loves/craves caffeine (especially in the morning), you understand how “non-functional” we can be before we have our Celsius.
For me personally, CELH helps me get through my day, which starts at 5 am with my work routine (chart reviews, newsletter, etc.) and then my morning workout, all of which happens before I spend the next 8-10 hours sitting at my desk, staring at 6 screens (and trading), running multiple investment services for thousands of subscribers before I go back to the gym for another afternoon workout followed by sauna, music studio session, and more work at my desk before trying to fall asleep around midnight. There’s no way I’m getting through this day without some caffeine, and for me, the option is simple: it’s Celsius or nothing. Not only do I love the taste of my favorite Celsius flavors (especially compared to coffee or other energy drinks), but I’m also getting some valuable nutrients, and most importantly, CELH gives me a sustained energy boost and not the spike/crash you get with most other products in the category like Red Bull, Monster, Rockstar, C4, etc.
When I first invested in CELH, they were fighting for warm shelf space and trying to grow their distribution through small regional operators but mostly doing DTR (direct to retailer), which means they were shipping products to stores (either directly or through the retailer’s distribution center) and then relying on employees to stock the shelves. Lots of young companies need to start with DTR, but it’s not ideal, especially for a beverage company that wants to be in the coolers.
Then, in 2020, Bang left Anheuser-Busch (BUD) and went over to PepsiCo (PEP), which opened the door for CELH to begin working with Anheuser-Busch. That really helped accelerate growth for CELH as they began to expand into larger retail chains, and they started getting some cooler space (but not much). Over the next ~2 years, the number of stores that carried CELH grew by approximately 10x, going from 15k to 150k.
Things were going well, but Anheuser-Busch distribution is actually dozens and dozens of smaller regional operators, which is much harder and more expensive to manage. Bang and Pepsi got off to a rough start (for reasons I won’t discuss here), and then Bang got sued by Monster in two different lawsuits, both of which Bang lost for a total judgment of ~$500 million, which forced Bang into bankruptcy. As this was happening, Pepsi terminated its distribution agreement with Bang.
Then, in August 2022, they announced they were investing $550 million into CELH for an 8.5% stake, as well as taking over distribution. This was a game-changer for CELH, the customers, and the shareholders. Pepsi is not only one of the most recognizable brands on the planet, but they’re also the largest beverage distributor, so this was a massive win for CELH and opened the door to unlimited growth opportunities in the US and abroad.
Usually, when I tell the CELH story to someone and try to explain how they’ve grown sales by 25x over the past 5 years, I say it was a combination of the following: great product, great execution, great marketing, and some luck. The first three are rather obvious at this point, but the luck part has to do with Bang because if they had never left Anheuser-Busch, then CELH may never have gotten a chance to work with a top 4 beverage distributor in the U.S., and then when Bang lost those lawsuits it opened the door for CELH to work with PEP which may not have happened if Bang’s CEO wasn’t such a lying lunatic that single-handedly destroyed Bang and wiped out ~$6 billion of market value.
By the way, Monster ended up buying Bang in bankruptcy and is trying to revive the company, but it’s not going well. Coca-Cola is Monster’s distributor, and that’s been a fabulous partnership for the past 10+ years; however, if Bang is going to get any cooler space, it will come directly from Monster and Reign, which means that any future success with Bang will probably be at the expense of Monster and their other brands.
Bang was becoming popular with the females and the fitness crowd, but it’s safe to say that Celsius has taken over both of those demographics. However, I will mention that Ghost, Alani Nu, and several others are also trending higher, but none of them are growing as fast as Celsius, and none of them can work with Pepsi for distribution.
The consumer base for Monster and Red Bull is approximately 70% male and 30% female; however, I can’t remember the last time I saw a female drinking either of these products/brands. Celsius, on the other hand, is 50% male and 50% female, so they’ve done a phenomenal job of appealing to women and I believe it’s for the following reasons:
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Women prefer the CELH flavor profiles
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Women prefer the CELH marketing message
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Women prefer the smaller CELH cans.
If Celsius is going to get to 10% global market share in the next ~8 years, it’s critical for them to have a large female consumer base, and right now, they’re definitely building one. Just spend 30 minutes on Instagram or TikTok, search for #Celsius hashtags, and you’ll see thousands of consumers (especially females) talking about how much they love CELH.
I also know for a fact that CELH appeals to consumers of all ages. I know 16-year-olds that drink CELH, and I know 80-year-olds that drink CELH; this is definitely not true with other brands like Monster, Red Bull, Rockstar, C4, etc.
The global coffee industry is valued at more than $550 billion so it’s at least 5x bigger than the energy drink industry, however the energy drink industry is growing ~2x faster than the coffee industry. This information doesn’t surprise me because I know dozens of people who have started replacing their daily coffee with a Celsius (this includes me); instead of having a coffee with breakfast and/or lunch, they now have a Celsius, same goes for that late-morning and/or mid-afternoon “pick me up” when you need some caffeine and now that person is drinking CELH for their caffeine needs.
If the coffee industry continues growing at 4.3% per year and the energy drink industry continues growing at 8.5% per year, then it would take 42 years for the energy drink industry to surpass the coffee industry. I’ll be pleasantly surprised if the energy drink industry is still growing this fast in 15+ years, but it’s always possible, especially if these energy/functional beverage products continue to get better and healthier, which means they’ll continue to bring in new consumers.
Investment Thesis
CELH is still one of my favorite stocks/companies and one of my highest conviction ideas for the next 5+ years, but let’s be clear about something: the stock is up almost 2,000% since I started buying shares in May 2020, which means the “easy big” money has been made and nobody reading this mini deep dive should expect anything close to these returns over the next 5-10 years.
If almost everything goes right for CELH over the next ~8 years and they hit my estimates (in the chart below), then I think CELH has at least ~350% upside over the next ~8 years, which would be a 21% CAGR — not bad, and probably 2-3x higher than whatever the indexes do but it’s clearly less than the 110% CAGR I’ve gotten over the past ~4 years. As many of us know from being CELH shareholders, the stock can be very volatile, with frequent pops and drops of 15% or more, so it’s certainly possible some shareholders will see better than a 21% CAGR if they are trading around their core position, averaging down on pullbacks and/or using options to complement their equity position.
I’m sure most of you are familiar with Monster and Red Bull, which are the two largest energy drink companies in the world. Together, they did approximately $18 billion in revenues in 2023, which means CELH (which should do at least $1.3 billion in 2023; we won’t know until they report their Q4 earnings) only does about 7% of their combined revenues. This just shows how much opportunity remains for CELH as they continue to take market share and expand outside of the U.S.
In 2024, the energy drink market is expected to reach ~$110 billion, growing at 8-9% per year, which means it will double over the next 8-9 years (rule of 72). Currently, CELH gets less than 4.5% of its total revenues from outside the U.S. versus 40-50% for Red Bull and Monster.
CELH is about to report its third straight year of triple-digit revenue growth, which is unheard of for a publicly traded company. When I invested in CELH in May 2020, they had just reported $75 million in revenues for all of 2019, and now, less than 5 years later, I believe CELH has a shot at $2+ billion in revenues for 2024, which is more than 26x revenue growth. Never in my wildest dreams did I think CELH would grow this fast, but a lot has gone right, including some luck.
CELH growth rates in the U.S. will begin to slow down (can’t grow triple digits forever), but some of this deceleration will be offset by international expansion, which started last week with the announcement that CELH was now available in Canada. CELH is launching with 7-Eleven but will expand to many other large, national chains later this month. CELH is currently available in parts of Europe and Asia, but it’s never been a priority for the company, and Pepsi was never involved until now.
With regards to Canada, they set up a separate website at Celsius.ca — the flavors are limited for now, but that will certainly change. I’ve lost track of how many flavors we have in the U.S. if you count the 12 oz cans and the 16 oz cans, but I think we’re well past 30 flavors for now, which some might say is too many, but I love it because it means every consumer should be able to find a handful of flavors they really love but encourage them to continue trying new flavors. This image below is only about half of the flavors, I still can’t find an image of all of them together.
Pepsi has already made a huge impact in the U.S. because they’ve opened a variety of new channels that CELH’s prior distributor (Anheuser Busch) could not have gotten them into, including schools, hospitals, restaurants, bars, stadiums, movie theatres, airports, hotels, and so many other places. This is why we saw massive revenue acceleration from the summer of 2023 through the summer of 2024, but now we’re seeing growth slow down because we’ve lapped the 1-year anniversary of Pepsi taking over distribution.
As a reminder, when CELH was working with Anheuser Busch, they were actually working with dozens and dozens of regional distributors, whereas now they just work with Pepsi, so everything on the operations side (manufacturing, shipping, fulfillment, etc.) has gotten very streamlined and efficient, which is one reason why we’ve seen profit margins move much higher over the past 5+ quarters. I believe we’ll continue to see margins improve over the next 5-10 years. Eventually, we could/should see net income margins above 20%, which is where Monster’s margins were pre-pandemic.
In my investment model, I have net income margins (NIMs) improving by 75 bps per year. It’s possible this is too conservative if Pepsi is able to increase operational efficiencies while CELH is able to reduce S&M (sales & marketing) as a % of total revenues, which is currently at 20%, but I’d love to see that number start heading towards 15% as they continue scaling up revenues. NIMs improving by 75 bps per year would end up being too optimistic if we saw significant increases in freight costs, raw material costs, manufacturing costs, S&M costs, legal costs, payroll costs, etc. — this is definitely something to watch going forward.
Currently CELH uses co-packers for manufacturing, I wonder if this will change at some point. Perhaps we’ll even see Pepsi take over manufacturing, which could increase additional cost savings for CELH. Now that CELH is expanding outside of the U.S., they’ll need to add more manufacturing capacity/partners, which will likely be localized to reduce excessive freight costs and comply with local regulations. CELH is not going to make the product in the U.S. and ship it to Germany or Australia. With regards to the CELH product in Canada, I’m not sure if they’re making that product in Canada or the U.S. I’m sure we’ll get clarity on the Q4 earnings call. I know that CELH had to lower the caffeine content (down to 180 mg) and add different labels in order to comply with Canadian laws.
The most recent Nielsen report showed that CELH is still growing U.S. retail sales by more than 100%, but this number will continue to come down over time. Nobody expected CELH to keep triple-digit retail sales growth as long as they did, and it had to start slowing down at some point. We’re also dealing with much larger numbers now than we were when Pepsi took over. Keep in mind that CELH is still growing 10x faster than Monster and 20x faster than Red Bull.
I mentioned above that the energy drink market is expected to hit ~$110 billion in 2024, just to be clear, those are gross revenues recognized by the end seller (retail store, Amazon, Costco, etc.), so the net revenue number recognized by the energy drink companies is approximately 50% of that gross number or $55 billion. Since I believe CELH will do $2+ billion in revenues this year, it means they could have a 3.7% global market share by year-end. I believe they can get to ~10% global market share over the next ~8 years. Keep in mind that Monster has ~16.5% global market share, and Red Bull has ~20% global market share — I expect global market share for Red Bull and Monster to decline over the next 5-10 years thanks to Celsius as well as some of the other emerging brands like Ghost, Alani Nu, C4, and Prime.
Since I believe CELH has a chance to reach 10% global market share in ~8 years, here’s the road map on how it happens:
To be honest, I’m very curious to see how the international markets accept CELH compared to the US and whether the same marketing strategies that worked in the US will also work outside of the US.
If CELH is going to get to ~10% global market share in ~8 years, then international needs to become a bigger piece of the overall pie, ideally getting to ~25% or more in 2032, which would still be only halfway to Red Bull’s international revenues as a percentage of their total revenues (~50%).
CELH has a much different consumer base than Red Bull and Monster. The average CELH consumer is younger and more female. I suspect these same trends will carry over to international markets, given the brand image and flavor profiles. I have no doubt that CELH will be very successful outside of the U.S. over the long term, but in the short term, I’m just wondering how quickly and aggressively Pepsi will take CELH into new regions and what the specific, localized sales/marketing strategy will be (versus the U.S. or other regions) and perhaps most importantly is how much money will CELH/PEP need to spend to order to ensure successful launches in every region. Lots of questions that we won’t have the answers to for many more quarters.
I know that CELH has crushed it with Instagram and TikTok on their own channels as well as partnering with influencers, athletes, etc., so I’m assuming this marketing strategy will work almost anywhere in the globe, especially Canada and Europe, which will probably be the focus for 2024 then maybe we see Asia, Africa, Australia, and South American in 2025 (just my guess).
Product Pipeline
Right now, CELH has 3 main products, which are the 12 oz cans (200 mg of caffeine), the 16 oz cans (280 mg of caffeine), and the powder sticks (great for traveling). They also have a BCAA product, but I’m not a fan, and I don’t know anyone who drinks them, so I’ll leave them out for now. With regards to the 16 oz cans, this product line used to be called Celsius Heat, but it was rebranded as Celsius Essentials back in December.
As far as I can tell, CELH has at least 24+ flavors in the 12 oz cans, 6+ flavors in the 16 oz cans, and at least 9+ flavors in the powder sticks. It appears that CELH wants to keep adding more flavors (SKUs) for these three product lines, which I’m totally fine with; however, there are 4-5 products that I hope CELH brings to market in the next 12-18 months…
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100 mg product (10 oz can) — this would be ideal for people more sensitive to caffeine or people who would like to drink a Celsius in the afternoon but don’t want the 12 oz can with 200 mg of caffeine.
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0 mg product (12 oz or 16 oz can) — I honestly believe a caffeine-free product would be huge for Celsius because it would allow them to compete in the soda and seltzer categories, which are both enormous.
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Hydration products (20 oz or 24 oz bottle) — I’ve been a big Gatorade Zero drinker for the past couple of years; I’ve also tried BodyArmor, Prime, and several others, but none of them would stack up against a Celsius hydration or Intra-workout product. I think it would fit perfectly with the current brand image and consumer base.
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Protein drink (20 oz bottle) — I’d be less excited about this product, not because I don’t think it would be awesome and generate some revenue but because there’s already a ton of RTD (ready-to-drink) protein products on the market, including Fairlife, Premier Protein, Muscle Milk, Lean Body and dozens more. Just not sure it makes sense for CELH to get into the protein shake market.
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BCAA product — CELH currently has a BCAA product. It should be either discontinued or improved, and it should not have caffeine in it. CELH should develop a new BCAA product that can be consumed intra-workout or post-workout, ideally with 10g of BCAAs (perhaps some creatine and other nutrients). There’s definitely some overlap between a hydration product and a BCAA product. I believe there’s room for both since they do serve different purposes, but I’d also be fine with combining these two into one amazing hydration/BCAA/intra-workout drink the right way to do it would be separate products because my body needs during a workout are different than what I need after a workout when my muscles are depleted and better prepared to absorb the BCAAs and creatine for repair and recovery.
Not only do I think it’s important for CELH to expand the current product lineup in order to continue growing revenues and bring more consumers into the ecosystem, but CELH now has 20,000+ branded coolers placed in high-traffic retail stores/locations which are perfect for showcases products besides the 12 oz energy drinks.
If we don’t see any new products in the next 12-18 months, I’ll be extremely disappointed and will probably be in my CELH position because it shows me that management isn’t willing to be as aggressive as I want them to be. It also shows me that Pepsi isn’t looking for CELH to launch any new products that might compete with their own products inside the coolers. Pepsi owns Gatorade, so if we don’t see a hydration product from CELH, it’s very possible that Pepsi was throwing up roadblocks, and I’m guessing that CELH would not develop any products that Pepsi wasn’t willing to distribute.
Valuation
As of January 12, CELH has an enterprise value ((EV)) of $13.22 billion; I’m going to use my 2024 estimates because I honestly don’t care what the analysts think since they’ve been playing catchup for the past few years.
I believe CELH will do $2.05 billion of revenues this year with 49.5% gross margins, 23.0% EBITDA margins, and 15.5% net income margins. These numbers/margins would result in $1.015 billion of gross profit ((GP)), $472 million of EBITDA, and $318 million of net income ((NI)).
If CELH does indeed hit my estimates, the stock is currently trading at:
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6.45x EV/SALES
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13.0x EV/GP
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28.0x EV/EBITDA
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41.5x EV/NI (non-GAAP P/E).
CELH is not a cheap stock, but it shouldn’t be when you consider the fundamentals (growth rates) because, based on my estimates, EBITDA would grow by 60-65% in 2024, and net income would grow by 60-65% in 2024 so paying 41x net income for 60% growth would be a bargain and justify multiple expansion over the next 6-12 months (assuming they hit my estimates).
Right now, the analysts are looking for $1.8 billion of revenues with 21.1% EBITDA margins and 13.5% net income margins, which means CELH is trading at 34.7x EV/EBITDA and 54.4x EV/NI, and CELH only does these numbers then I would agree the stock is fairly valued at current prices.
The only real competition for CELH would be Monster Beverage Corporation ( MNST ), which currently has an enterprise value of $58.5 billion with revenue estimates of $8.013 billion in 2024 with 54% gross margins, 30.9% EBITDA margins, and 23.8% net income margins. Using these numbers, MNST is currently trading at:
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7.3x EV/SALES
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13.5x EV/GP
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23.6x EV/EBITDA
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30.6x EV/NI.
MNST looks a little bit more expensive on a couple valuation metrics and slightly cheaper on others, but when you consider that MNST is only growing revenues by 12% and earnings by 15% the stock looks way more expensive than CELH. Given all the new competition that MNST is facing, I wonder if they can even hit $8 billion this year, in which case the stock is even more expensive than the numbers above would suggest.
Conclusion
I’ll admit that my commentary might be a little biased, but that’s because I’m a large shareholder. With that said, I also believe there’s still plenty of upside to justify holding or even buying at these prices when you consider the total market size of $110 billion growing at 8-9% per year, CELH's global market share potentially going from ~2% to ~10% over the next 8-10 years, new product launches that expand the current total addressable market, or TAM, growing international sales from ~4% of total sales to ~25% of total sales over the next 8-10 years, improving gross/profit margins with the help of Pepsi by increasing operational efficiencies, and so much more.
Now you know how large the energy drink market is today and how large it could be in ~10 years. If CELH can get to ~10% global market share in the next decade, then the stock still has another 300-400% upside from here, maybe more if margins expand faster than my models and/or they expand their TAM but enter new product categories like hydration drinks, protein shakes, caffeine free, etc. in which case maybe we’re talking about $12-15 billion of revenues in ~10 years (assuming they are still an independent company).
The question I get asked the most is whether I believe Pepsi will someday buy CELH since they already have an 8.5% stake. Common sense tells me that Pepsi would love to own Celsius, but like everything else, it comes down to price. When PEP made that investment in August 2022, they got preferred shares at $25, which ($75 pre-split) looks like an incredible purchase price. I’m sure PEP regrets not investing more money for a bigger stake or perhaps just buying the entire company, but they were coming off a broken partnership with Bang, not to mention the $4+ billion disaster with Rockstar, so I’m sure Pepsi management team wasn’t about to drop $10-15 billion to acquire CELH until they got the product into their system and had a better idea of how quickly international sales could ramp up. I certainly don’t blame PEP for taking this more conservative approach; however, the decision to wait on an acquisition could be a costly one because they might have been able to buy CELH last August for $10 billion, but an acquisition today would cost at least $20 billion.
In case you didn’t know, approx ~9 years ago Coca-Cola ( KO ) was already distributing MNST, but they decided to invest $2.1 billion for a 16.7% stake which valued MNST at $12.5 billion. This turned out to be quite an investment because that stake in MNST is now worth ~$12 billion — a pretty sweet 470% ROI for Coca-Cola. I guarantee KO executives that they had just acquired MNST back in 2015, and I’m sure PEP executives don’t want to make the same mistake. If CELH does indeed grow into a $60 billion company over the next decade, then PEP could certainly justify paying $20 billion for that asset today, which would be a 200% ROI.
In all honesty, I don’t care if PEP buys CELH or not. If it happens, I hope it’s not for a few more years, but I have plenty of high-conviction stock ideas to redeploy my CELH proceeds, and if an acquisition doesn’t happen, I’m more than happy to hold my CELH shares for the long-term as long as the fundamentals remain strong and valuation remains reasonable.
Over the past ~3 years, CELH has had at least 11 pullbacks of 23% or more with an average pullback of 34%. However, many of these bigger pullbacks were before the Pepsi deal, which really helped change the narrative and give credibility to the company/story, so it’s very possible we don’t see any more 40% pullbacks for CELH, which means if that’s what you’re waiting for to start buying shares than your opportunity may never arrive and I’d argue if CELH did drop 40% would you have the nerves to actually buy or just keep waiting for it to go lower but never actually pull the trigger.
CELH is up +24% in the past couple of weeks after pulling back -29% from the all-time high on September 2023. Even though I have a large position, I’d consider adding to my position if the stock pulled back to the 50d sma at $54 and then again at the 200d sma ~$50; there’s really no reason for me to add above $60.
If you’re looking to start a CELH position but worried the stock might pull back, I’ll give you the same advice that I give my friends, which is to start a 1/3 position. If the stock rips higher, then you’ll be glad you bought some shares. If the stock pulls back, you’ll be glad you only had a 1/3 position, and now you can average into a larger position at lower prices. This strategy is a win/win and one that I often use in my own investment portfolio.
For instance, early last year, I started small positions in ONON and SDGR . Shortly afterward, ONON crushed earnings and popped 60% in just a few days. SDGR got caught up in the AI-hype cycle and went up 200% in just a few months, so I was able to sell and lock in the gains. Looking back, I wish I had started bigger positions, but I was glad that I at least had a 1/3 position in both.
Perhaps after CELH reports Q4 earnings and provides more clarity on its international growth plans for this year, I’ll be able to put together a follow-up note.
For further details see:
The Future Of Energy Drinks: Mini Deep Dive On Celsius Holdings