Is it too late to buy Celsius shares?

You’d be hard-pressed to find businesses that have rewarded their shareholders more than that Celsius (CELCH -0.13%) has. The energy drink supplier, known for its health-focused branding and natural ingredients, has seen shares catapult 2,560% higher over the past five years. That kind of profit would have turned a $1,000 investment into a staggering $26,600 today.

But after such a phenomenal performance, it is too late for investors to buy this boom stock of drinks?

Growth slowed

Celsius just reported financial results for Q2 2024 (ended June 30). The business beat Wall Street estimates on both the top and bottom, which was a pleasant surprise.

Sales increased 23% to a total of $402 million, driven by balanced percentage gains in North America and internationally. It’s worth pointing out that Celsius is still a domestically run enterprise, as only 5% of revenue came from outside its home continent. With PepsiCo as a strategic distribution partner, perhaps Celsius will be successful in building a more global presence.

What shareholders might recognize right away is the deceleration in revenue that is taking place. In 2021, 2022 and 2023, sales increased by 140%, 108% and 102% respectively. But these quick wins are probably a thing of the past. To its credit, however, Celsius has gained market share compared to a year ago in the energy sector at a time when the two dominant brands, Red Bull and MonsterI lose share. That’s encouraging.

The top line could experience a noticeable slowdown. But Celsius is starting to flex its bottom line muscles. This is an indication of operating leverage, a case where a business’s revenues are growing at a faster rate than its expenses.

Last quarter, the company generated net income of $79.8 million. This figure represented a 55% year-over-year jump. Moreover, it translated into a superb net profit margin of 19.9%.

Monster Beverage, which reports sales nearly five times that of Celsius, posted a net profit margin of 22.4% in the three-month period that ended on June 30. I suspect this is Celsius’ upper limit, so there may not be much room left to expand the company’s margin.

Evaluation vs. quality

At its all-time high in March, Celsius shares traded with a nosebleed price-earnings ratio (P/E) of 126. The market was overly excited about the company’s prospects, as investors likely assumed that triple-digit percentage growth would occur indefinitely. This belief was clearly wrong.

However, even though the stock is now trading at a more reasonable P/E multiple of 39, I still don’t think Celsius is a worthy investment candidate. That’s because I honestly don’t think it’s a high-quality deal.

Let’s look at the industry. Barriers to entry are virtually non-existent and there are no switching costs for consumers. Given the rapid growth in the energy drink space, more competition is likely to emerge, creating an even more crowded market.

Therefore, it is probably a fair assumption that Celsius does not have an economic moat. At its current scale, its brand likely doesn’t have the affinity with customers that you see with a Coca cola in the beverage industry in general and Monster in the energy drink market in particular.

A perfect argument in support of this is management’s decision to engage in greater promotional activity to mimic the pricing actions taken by its key rivals. If Celsius had customer loyalty they could have avoided this.

Even though Celsius is trading 59% off its peak price and at its lowest valuation in three years, I’m still not convinced that the stock is a smart buying opportunity. As a result, monster earnings could be a thing of the past, which means it’s too late for potential investors.