Celsius Stock: The Valuation Finally Makes Sense Now (NASDAQ:CELH)

Down 68% from its high, has Celsius Holdings (NASDAQ:CELH) stock finally become undervalued? This is the question that many people may be asking now, and it seems like the valuation finally makes sense. If analysts’ estimates are met, then CELH stock could trend higher eventually.

However, it’s worth noting that revenue and EPS estimates for Celsius have been declining, and these downward revisions can continue. At the same time, though, these estimates may have come down to reasonable/reachable levels now, as we’ll explain below. Plus, the stock has fallen quite a bit, which factors in these revisions.

Overall, we rate CELH stock as a Buy. Despite the uncertainty, it has proven itself as a profitable growth stock, and it’s trading at a reasonable valuation. We’ll go over the negatives and the positives, and near the end, we’ll present both the bull and bear case for the stock.

Why Has CELH Stock Fallen Recently?

Over the past few months, CELH stock has tumbled. This can be attributed to lower expected growth from the company. Essentially, it has turned from a hyper-growth stock to just a regular growth stock. When that happens, the shareholder base changes, and most of the hyper-growth investors sell out.

But the stock also fell by 11.6% this Wednesday and started selling off in mid-day trading. So what happened there? That can be attributed to commentary made by the company in its recent conference call with Barclays (the Barclays 17th Annual Global Consumer Staples Conference).

In the conference, Celsius CEO John Fieldly stated that PepsiCo (PEP) is still continuing to optimize its inventory. This is a problem because, for those of you that don’t know, Pepsi is partnered with Celsius to distribute its drinks. Basically, Pepsi has been ordering fewer drinks from Celsius because it wants to keep lower inventory levels. Specifically, PepsiCo has reduced its orders by $100 million to $120 million in Q3.

Since Celsius recognizes revenue when the product is delivered to PepsiCo rather than when customers buy Celsius drinks at stores, this is affecting Celsius’s reported revenue. It has created a “disconnect,” according to the CEO because in-store demand is strong, but the actual revenue figures don’t show that yet.

Another comment that investors probably didn’t like was the one about margins. As you can see highlighted in the image below, the CEO stated that Q3 will see negative margin impacts due to the Pepsi orders.

Does It Really Matter That Pepsi Is Keeping Less Celsius Inventory?

We don’t think it matters in the long term, as it’s not indicative of the true demand for Celsius drinks. It makes sense for Pepsi to want to be more efficient and keep as little inventory as possible. Clearly, Pepsi had more inventory than it needed, but since Celsius sales are still strong, Pepsi will eventually have to re-order from Celsius.

So this seems like a case of short-term pain, long-term gain regarding Celsius’s recognized revenue. It sets the stage for easier comps in Q3 2025, and any margin woes from Q3 2024 can be reversed in Q3 2025. Management seems to believe so as well, stating in the Barclays conference call (highlighted in the screenshot above), “We see great opportunities for margin enhancement outside of the normal ordering processes.”

Celsius’s Margins/Profitability Have Become Strong And Are Trending Higher

Speaking of margins, a positive thing about Celsius is that its margins have become strong and have generally been trending higher. For instance, take a look at its historical gross profit margin below. Its TTM gross profit margin is 50.4%, and the five-year average is 43.7%, showing just how much the margin has trended higher. This is a sign of a competitive advantage, so we’ll take the CEO’s word for it when he said, “We have a competitive advantage” in the quote above.

The same can be said about its levered free cash flow margin, which sits at a record-high level of 16.5% for the past 12 months.

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Its net income margin of 19.6% tells the same story. So, it’s clear that Celsius has some sort of advantage for it to be able to grow so quickly and still be profitable. It’s actually almost as profitable as Monster Beverage (MNST), which has a net income margin of 22.8%, a levered free cash flow margin of 20.8%, and a gross profit margin of 53.7%.

Additionally, its return on equity, a metric loved by Warren Buffett, hit 119.7% in 2023 and is currently sitting at 88.3% for the past 12 months, and the company achieved this without the use of debt. With Celsius now expected to stay profitable, the ROE will consistently be positive, and we see no reason why it won’t stay relatively high in the future. For reference, Monster’s five-year average ROE is 24.2%, and an ROE over 20% is considered to be high.

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Growth Is Slowing Down. Estimates Keep Getting Revised Lower

It’s no secret that Celsius has seen slower revenue growth recently. In the screenshot below, you can see that in Q2 2022, Celsius’s revenue grew by nearly 137%. Meanwhile, Q2-2024 showed 23.35% growth.

Looking ahead a couple of quarters, analysts expect a 12.3% decline in Q3-2024 revenue to $337.45 million and a 9.18% increase in Q4 to $379.35 million. However, it’s worth noting the Pepsi situation explained above, which will weigh on Q3 in the short term.

Still, based on Nielsen data for the 4-week period ended August 24, Celsius only grew sales by 5.9% year-over-year. Plus, the company saw an 18.5% decline in price/mix. This could mean that Celsius is either selling its products at lower prices or selling more lower-priced products in its mix.

Also, management noted the following in the Barclays conference (see the quote below): “Sales were up for the quarter, quarter-to-date about 10% with Circana within the scan data.” While 10% is a good growth rate on top of the high growth seen in the past, it’s likely not high enough to satisfy growth investors.

Now, let’s talk about the earnings and revenue revisions. These estimates keep getting revised downward. At the end of March 2024, EPS for Fiscal 2024, 2025, and 2026 were expected to be $1.10, $1.54, and $2.05, respectively. Now, these EPS estimates have come down to $0.92, $1.19, and $1.64.

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Similarly, at the end of March, analysts were expecting 2024, 2025, and 2026 revenue figures of $1.88 billion, $2.48 billion, and $3.21 billion, respectively. Currently, though, the estimates read $1.48 billion for 2024, $1.83 billion for 2025, and $2.35 billion for 2026. This goes to show how unreliable analyst estimates can be sometimes for growth stocks.

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As you can see in the charts above, there has been a consistent five-month downtrend regarding EPS and revenue estimates. Currently, the short-term trend is down, and it’s hard for us to say with 100% confidence that we’ve reached the bottom for these revisions, especially with the relatively soft 5.9% growth shown in the Nielsen data. However, there is still a chance that Celsius can meet these revenue estimates. Let’s dive in.

But Celsius Has A Chance Of Meeting Revenue Estimates

While we stated above that the trend is down for revenue estimates, there’s still some hope that Celsius can meet projections, even if they seem high at first glance.

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Let’s take a look at Q3 2024 and Q3 2025, for example. Given that Pepsi is potentially ordering $100 million to $120 million less product in the quarter ($110 million at the midpoint), revenue estimates for Q3 2024 are a measly $337.45 million. However, Pepsi may have to restock its inventory next year. If we assume that things normalize with Pepsi’s orders, the situation looks much better.

Let’s take management’s comment about it seeing 10% sales growth for Q3 2024 (not including the Pepsi orders). If that growth rate holds for the rest of the quarter, then sales (again, unadjusted for Pepsi) could be closer to $422.8 million. We arrived at this number by adding 10% to Q3-2023’s revenue figure of $384.8 million.

Next, in order to get to the $466.3 million estimate for Q3 2025, all Celsius would need to do is grow by 10.3% year-over-year from that $422.8 million figure, which seems reasonable. Plus, this doesn’t take into consideration the potential upside from international growth, product innovation, or new distribution channels that Celsius has hinted at. Further, Celsius has been affected by macroeconomic headwinds lately, but Toby David (Celsius’s Chief of Staff) stated in the Barclays conference that he expects the category will “bounce back,” as you can see in the conference call screenshot a few paragraphs above.

Of course, these are just assumptions, but it’s some good food for thought (or energy drinks for thought).

Quick disclosure: I am aware that it’s not an apples-to-apples comparison, as I’m comparing a non-Pepsi-adjusted quarter (Q3 2023) to a Pepsi-adjusted quarter (Q3 2024) in my assumptions.

Market Share Growth Has Stopped For Now

Some may point to Celsius’s market share flattening in the U.S. as a sign to jump ship, and that’s a valid concern, but let’s dive deeper. If you look at MULO+ W/C market share (the dotted lines below) for Celsius, you can see that it’s roughly at the same level from the end of January 2024 (from 12.16% in January to 12.04% in July).

By the way, for context, MULO+ W/C is defined as follows in Celsius’s investor presentation: “A Circana measurement geography that includes MULOC reported sources and additional ecommerce and club channel sources.” Celsius prefers this metric because it gives the firm “better visibility on the overall health of the brand,” according to the CEO, in the Barclays conference call. However, the figure seems to have dropped a bit more since July 14, as the CEO stated in the Barclays call that the market share is around roughly 11.8%. See below.

Nonetheless, it’s likely too early to say if the market share will keep trending downward. If you look at the market share from 9/10/2023, which was 11.50%, you can see that it stayed flat for the next three months before eventually trending higher. So, while the market share growth trend has certainly stopped in the short term, it remains to be seen if this will last into the longer term.

Another thing to consider is that Celsius can gain international market share going forward. Even though its International revenue only makes up 5% of revenue at the moment, it grew by 30% in Q2, which is nothing to sneeze at. The firm expects to expand into multiple countries by the end of this year.

In the Barclays conference call, Celsius’s CEO stated, “International right now is about 5% of our revenue mix. So just keep that in mind. It’s about 40% of the revenue mix for Monster. So the opportunity is massive and it’s huge.”

How Does The Valuation Look Now?

Overall, the valuation for Celsius stock is now looking reasonable, making us bullish on the stock for the long term. We’ll use our reverse DCF calculator to help value the stock. Essentially, the calculator spits out an implied growth rate that the market is expecting, and then we decide if the stock can exceed that implied growth rate (which would make it undervalued) or not (which would make it overvalued). A more comprehensive guide can be found here.

Here are the assumptions we used for the calculation:

FCF per share: $1.06

Required rate of return (cost of equity): 9.1% (taken from Finbox, which calculated it using the CAPM model)

Terminal growth rate: 2.5% — we used this as the terminal growth rate because it’s roughly in line with long-term inflation and GDP growth, so it’s reasonable to use it as a long-term growth rate.

Current share price: $31.73

As you can see below, the calculator suggests that the market is pricing in 11.209% annual FCF/share growth for Celsius for the next 10 years and then 2.5% growth in perpetuity after that. Given that analysts expect much higher growth for revenue and earnings over the next few years, this implied growth seems too low.

When looking at FCF estimates, the valuation story changes a bit, but the stock still seems reasonably valued. Per simplywall.st, analysts expect free cash flow of $314.9 million for Fiscal 2026 compared to $245.94 million for the past 12 months, indicating a 2.5-year CAGR of 10.4%, almost in line with the implied growth rate.

Let’s also take into account that the company has no debt and a cash balance of $903 million (about 12% of its market cap). This money can be used to buy back shares, especially if the price keeps dropping, which will boost the per-share figures if done at a good enough price that will offset the loss of interest income from depleting its cash position.

Let’s Recap

There’s a lot of information above, so let’s give a quick summary of what was said.

Reasons to Consider Buying CELH Stock

There are a few reasons to consider buying CELH stock. First, Celsius’s profitability is trending higher, indicating a competitive advantage. Next, Pepsi’s decision to lower its inventory of Celsius is only a short-term impact that doesn’t affect how many people buy the drink in stores. Eventually, Pepsi will need to stock up again.

Additionally, Celsius’s Chief of Staff expects that the energy drink market will “bounce back” from current macroeconomic headwinds. This can help Celsius actually meet analysts’ estimates, which have been revised to reasonable levels.

Looking to the long term, Celsius has lots of growth potential in the international market. Plus, the company has plenty of cash and no debt on its balance sheet, providing it with the funds to pursue growth opportunities.

Finally, CELH stock’s valuation has come down to reasonable levels that don’t price in crazy growth anymore, making it appealing.

Reasons to Consider Staying Away From CELH Stock

Now, let’s look at the negatives. Celsius’s market share growth has stopped in the short term, and its revenue growth has also slowed down considerably. For instance, Celsius only saw 5.9% year-over-year growth in the most recent Nielsen data.

On top of that, the stock’s EPS and revenue estimates keep getting revised lower, with the trend being downward for now and no guarantee of the trend reversing.

Moreover, Pepsi’s decision to keep less inventory adds uncertainty to the investment thesis. Finally, The company’s profitability has reached a high level, but it’s not quite as high as that of Monster.

The Takeaway

Although there’s uncertainty in this investment thesis — including a growth slowdown, market share stagnation, and downward revisions — which makes us refrain from calling a Strong Buy or a strong conviction play, we still think the positives outweigh the negatives.

At the current valuation, the market is anticipating just 11.209% FCF/share growth over the next 10 years, and then 2.5% in perpetuity after that. That makes the stock reasonably valued when considering that FCF is expected to grow at a 2.5-year CAGR of about 10.4% and that revenue growth estimates for 2024, 2025, and 2026 come in 12%, 23.8%, and 28.8%, respectively.

On top of that, Celsius has proven to be a strong company, with high and improving profitability metrics that indicate a competitive advantage plus a strong cash position with no debt.

It seems as though the market slightly overreacted regarding the Pepsi news, and we believe Celsius can bounce back next year when Pepsi orders normalize and the energy drink industry potentially bounces back.