Where will Celsius stock be in 3 years?

Celsius (CELCH 0.53%) shares are up 84% over the past three years (as of Aug. 20). That sounds like an impressive gain, but it’s important to point out that the stock is down 58% in the last five months alone. The market may be facing the fact that the company is entering a new phase of its life cycle, one characterized by a more mature profile.

Celsius likely caught the attention of investors looking to take advantage of the weakness. Where will this grow stock of drinks be in three years?

Expect growth to slow

The most important factor contributing to the rise in Celsius’ share price has undoubtedly been the extraordinary growth in revenue. Sales totaled $1.3 billion in 2023, up a staggering 25-fold from five years earlier in 2018. Celsius relied on its marketing tactics emphasizing health benefits. And it tried to expand the number of retail locations where the products are in order to reach more customers and expand the sales base. This plan obviously worked wonders.

However, growth will slow. In fact, it already is. Revenue rose 29% in the first six months of 2024. Management called for delicacy in the energy drink category of the general beverage industry. It also doesn’t help PepsiCoCelsius’ key distribution partner, is reducing its stock levels.

According to Wall Street consensus analyst estimates, the business is set to grow sales by 23% annually between 2023 and 2026. This shows a significant deceleration compared to previous years. I think this perspective is totally reasonable. Companies can’t grow to the moon forever. And in Celsius’ case, it may have already captured all the low-hanging fruit as it expanded its distribution capabilities.

But the bright spot for Celsius is outside of North America. The company started selling its energy drinks in Canada, the UK and Ireland in the first months of 2024. New Zealand, Australia and France will be used in the back half of this year.

For what it’s worth, investors should be encouraged that the business is very profitable. This is not usually the case with fast-growing businesses like this one. In Q2, net income totaled $80 million, representing a margin of just under 20%. This is definitely a bright spot.

Rating headwind

At the all-time high in March, stocks were trading ridiculously low price-earnings ratio (P/E) ratio of 126. Because of the steep decline in the stock, the stock is now selling at a P/E multiple of 40. Investors who remain bullish on the business may see this as a no-brainer buying opportunity. All else being equal, paying a lower assessment is desirable.

I’m not so sure about that prospect though. At the current valuation, I still think the stock is richly valued. I think it’s very reasonable to expect Celsius’ P/E ratio to continue to decline from here. Maybe it’s starting to get close to industry heavyweights Monster DrinkP/E multiple of 29. This creates a 28% headwind for investors. At that level, I would take another look at Celsius and reevaluate the stock.

But this potential price drop might not be good enough. I also have limited confidence in Celsius’ long-term prospects. Its ultimate success is far from a certainty. The business operates in a highly competitive market, one where consumers have a seemingly limitless number of choices when it comes to energy drinks. The company’s top-line deceleration could be an early indication that its best days are in the rearview mirror.

Celsius stock has been a big winner in the past. But I’m not so optimistic that this action will outperform S&P 500 in the next three years. Therefore, I will gladly pass on the purchase of the business.