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Why Celsius Holdings Stock Popped This Week

Motley Fool - Thu Aug 10, 5:08PM CDT

What happened

Shares of Celsius Holdings(NASDAQ: CELH) have jumped as much as 25% this week, according to data provided by S&P Global Market Intelligence. The energy drink brand is growing revenue north of 100% year over year with expanding margins and strong profitability. As of this writing, shares of Celsius stock are up 72% this year and up a whopping 3,500% in the last five.

So what

In the second quarter, Celsius' business continued to thrive. Total revenue grew 104% year over year to $325.9 million as the energy drink brand continues to gain market share around the world. Using health-focused marketing, Celsius has been able to appeal to a broader audience and steal customers from legacy brands such as Monster and Red Bull.

With this strong growth has come margin expansion. Celsius' gross margin was 48.8% in Q2 of this year compared to just 38.5% in Q2 2022. This led to net income hitting $41 million -- a 12.6% net margin -- in the quarter. Growing revenue 100% year over year by itself is impressive. To do so while also generating profits for shareholders is an outstanding result for Celsius.

A big help for Celsius has been its partnership with PepsiCo. The companies launched a partnership last year, which got Celsius onto the Pepsi distribution network to supercharge unit-volume growth around the globe. PepsiCo also made a $550 million investment into Celsius, getting preferred stock that equates to an 8.5% ownership stake in the company. It also pays a 5% annual dividend yield. It looks like both companies are benefiting from the new contract, with Celsius' unit volumes exploding while Pepsi sees its investment appreciate in value.

Now what

With its huge jump in share price, Celsius now trades at a market cap of $13.3 billion. This looks expensive vs. its trailing-revenue number of close to $1 billion and shows that investors are putting high expectations on the company to continue growing. But they may be underrating the power of compound growth, especially when it is in the triple digits. If Celsius can quadruple its revenue over the next few years, it will be doing $4 billion to $5 billion in annual revenue, which doesn't look crazy vs. its current market cap of $13.3 billion.

The stock does not come without risk, but if you believe Celsius can continue growing its volumes and become a top global drink brand, shareholders will likely see good returns in owning shares over the long term.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius. The Motley Fool has a disclosure policy.

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