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With Celsius Stock Up 100%, Have Investors Missed the Boat?

Motley Fool - Fri Sep 8, 8:15AM CDT

Health-focused energy drink maker Celsius Holdings(NASDAQ: CELH) has been on a tear. After reporting explosive revenue growth yet again in the second quarter, the stock has soared around 40% in the past month as investors get more bullish on the drink brand's long-term growth prospects. Celsius is making major inroads in the lucrative energy drink market and looks poised to become the third dominant player along with Monster and Red Bull.

With shares now up over 100% this year -- and a whopping 40-fold in the last five years -- have investors missed all the gains in Celsius stock? Or is this party just getting started?

Explosive growth, partnership with Pepsi

Celsius has differentiated itself vs. traditional energy drink brands by marketing itself as healthier and for people with active lifestyles. We can let the nutritionists decide whether this is actually true, but either way, the message is resonating with consumers.

Last quarter, Celsius' revenue grew 112% year over year to $326 million, with the majority of sales coming from the United States. This is on top of 137% year-over-year revenue growth in 2022, making the company one of the fastest-growing businesses in the world over the last couple of years.

One big help -- at least recently -- has been the company's partnership with PepsiCo. Pepsi made a major investment in Celsius back in August of 2022, a part of which included Celsius joining the Pepsi distribution network. This will have multiple benefits for Celsius, including better shelf space at stores and an immediate uplift in selection across the country.

But perhaps more important will be international distribution. Celsius is closing in on a 10% market share among energy drinks in the United States but is a rounding error outside of its home market. If this explosive growth is to continue in the years to come, Celsius will need to take advantage of Pepsi's global distribution and gain market share internationally.

CELH Revenue (TTM) Chart

CELH Revenue (TTM) data by YCharts.

What is the market opportunity?

Celsius' annual revenue is closing in on $1 billion, a number it will likely well eclipse this fiscal year. As mentioned above, this gives them just under 10% market share in the United States.

But the opportunity globally is much larger. Analysts estimate that the energy drink market was $86.4 billion in 2021 and that it will grow at an 8% annualized rate through 2030. The category continues to take market share from traditional beverage types such as juice or soda, a trend that will likely continue in the coming years. If these projections hold true, the global energy drink market will hit around $180 billion in 2030, which is more than 100 times the size of Celsius' business today.

While this rapid growth is not guaranteed to continue, it wouldn't be surprising to see Celsius' revenue hit a much larger number in 2030 if the brand can start resonating in international markets.

The valuation looks stretched right now

The problem for investors today is that a lot of this potential growth is already priced in. At today's stock price, Celsius has a market capitalization of about $15 billion. The business is not profitable right now due to its rapid growth, but there's no reason it can't achieve similar operating margins to Monster Beverage (above 25%) at maturity given the similarities in business models.

Assuming Celsius could hit a 25% operating margin today, the business would be doing $250 million in earnings on $1 billion in revenue. That equates to a nosebleed price-to-earnings ratio of 61. Even if sales triple to $3 billion, that leaves the ratio at approximately 20, which is around the market average for U.S. stocks.

This is not to say long-term shareholders should sell. But if you are thinking of buying shares today, you need to be confident this business can grow its revenue to much greater heights in the years to come. Expectations are high for Celsius right now.

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

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