When will Celsius stock go on hiatus in 2024?

Until this year, Celsius Holdings (CELCH -1.27%) it was all about high expectations. Shares of the functional beverage company rose as its slim cans of fruit-flavored, metabolism-boosting sparkling water gobbled up market share in the energy drink space. But the last few months have been a different story.

The stock is now down 41% this year, down 67% since it peaked just four months ago. The most recent move down was a 12% drop on Wednesday after a troubled presentation from investors. Celsius revealed that pop star PepsiCo — its main distributor and minority shareholder — continues to slow the pace of its orders. It’s a bad look for a stock that was priced for flashy growth that Celsius had no problem delivering before the summer swoon. Let’s zoom in on the current downside before zooming out to measure the best chance of a comeback.

When the gas goes flat

Celsius stunned investors Wednesday by announcing that PepsiCo’s orders would fall by $100 million to $120 million for the third quarter ending this month. It offset the unexpected decline by pointing out that scanner data showed retail sales of its products rose 10% this summer, but revenue recognition was keeping pace with distributor orders.

This is not the first time PepsiCo’s declining orders have caused Celsius investors. PepsiCo’s spring stock discounts have begun to eat into the stock. Analysts noted that checks on retail channels also showed a slowdown in growth. The bullish argument that PepsiCo is optimizing its inventory management doesn’t hold much weight now that it appears to be a leading indicator of consumer demand.

Image source: Getty Images.

I’m trying to call an ass

Celsius has seen triple-digit revenue growth in each of the past three years. Things will be very different in 2024. Revenue grew just 23% in its last quarter, and the third quarter is now shaping up to be considerably worse. Since the investor presentation, at least seven analysts have cut their price targets on Celsius stock. The feeling and the impulse are not kind.

However, you don’t have to look hard to find silver linings. For starters, all but one of the seven downward revisions have revised price targets that are now between $45 and $53. That represents 39% to 63% upside from Wednesday’s closing baseline. The obvious bear counter is that the same analysts have been playing limbo for the past few months as they watch the stock move lower. PepsiCo’s inventory management aside, it’s clear that Celsius is maturing and the heady growth days in the United States won’t be coming back anytime soon.

Bulls may argue that Celsius can thrive as an earnings growth story even in a difficult growth period. Its bottom line has grown much faster than its top line since PepsiCo became its primary U.S. distributor two years ago. Remember the 23% revenue growth it posted in the second quarter? Earnings per share rose 65% better than expected. Celsius has topped Wall Street expectations by a double-digit percentage over the past five quarters.

Unfortunately, the math won’t be as good if earnings continue to plummet and turn negative as the year progresses. Celsius is trading at 33 times this year’s estimated earnings and 28 times next year’s target. Those would have been attractive multiples earlier this year, when earnings growth was robust and analysts were revising their estimates higher, but those forecasts have trended lower in recent months. Wednesday’s disclosure will only reduce those targets.

International growth may save the day for Celsius, but it will take a long time for that sun to rise. International growth has outpaced domestic earnings this year, but it still represents less than 5% of the revenue mix. A more encouraging near-term catalyst could be an increase in distribution later this year as temperatures begin to cool. PepsiCo speculated earlier this summer that consumers are dealing with brutal temperatures this summer, looking for more traditional means of hydration. Will it be autumn that brings Celsius back to life?

In a world of beverage stocks, Celsius is no longer a darling market with stunning growth. However, it continues to offer a differentiated product with strong brand appeal. Activists or potential acquirers may be more interested in Celsius right now than investors, but it doesn’t always have to be that way. Winter is coming and not necessarily in a bad way.