This Ultimate Growth Stock Is Down 66%: Is It Time to Buy a Dip?

Perhaps there is nothing more powerful than an expanding consumer packaged food brand with a huge target audience. Brands like Coca cola, PepsiCo (PEP 0.19%), Hersheyand Gatorade are just a few of the examples available. Once a new consumer brand gets established and has national (or even international) distribution, suddenly there is a long growth track. Even better is if the product category itself receives additional consumer attention.

Such is the case with Celsius (CELCH 3.10%). The energy drink maker has grown like gangbusters over the past decade, and that’s helped boost its stock price over that decade by more than 40,000% at one point earlier this year. Unfortunately, the gas in this beverage maker is starting to flatten out.

Shares of Celsius are trading down nearly 67 percent from all-time highs set in early June as it works through a new distribution relationship with PepsiCo and manages concerns that the energy drink category is slowing. Investors have turned pessimistic about future growth prospects on news that its revenue growth has slowed rapidly in recent quarters.

With the stock now trading much cheaper than at the start of the year, let’s see if now is a good time to take the plunge and buy some Celsius stock for your portfolio.

Celsius: Reinventing energy drinks

Celsius entered the energy drink market targeting consumers interested in eating (and drinking) healthier and looking for sugar-free energy drinks with vitamins. This is a different brand narrative than what Monster Drink or Red Bull conveys to their potential customers. By going down this marketing path, Celsius has built a huge presence in the fitness industry and among female consumers.

Over the past five years, Celsius’ has grown its revenue by more than 2,000% and is now the third largest energy drink category in the US with a market share of 5.9% (as of 2023). Revenue was $1.49 billion in the last 12 months. The vast majority of sales still come from North America.

The increase in size has also led to increased profitability for Celsius. For years, Celsius has either operated at a loss or near break-even due to its preference for reinvesting cash flow for future growth. Now, the company is reaching a large enough scale that the economics of the core business unit shine through to the bottom line. Operating earnings were $334 million in the trailing 12 months, or a 22.5% margin. Monster Beverage — its closest competitor — has a profit margin of 27 percent.

Pepsi pressure, slowing category growth

A few years ago, Celsius signed a big deal with PepsiCo to bring Celsius into its distribution network. This allowed Celsius to get better shelf space in convenience stores and grocery stores, which is huge for consumer food and beverage brands. This change in distribution helped Celsius to increase its growth rate tremendously. In the second quarter of 2023, for example, revenue was up more than 100% year over year.

During the same period this year, revenue growth slowed to just 23%. What Celsius has now told us is that it oversold stock to PepsiCo at the start of the distribution deal, which made the revenue growth look better than it actually was. Now, we’re seeing the opposite effect as PepsiCo works to normalize its inventory with the brand. To be clear, a 23% increase is still impressive, especially when you factor in the headwinds of distribution. There is no concern that Celsius is losing its brand status in the US

Another headwind is the overall growth of the energy drink category. Celsius management told investors at a recent investment conference that some energy drink players are seeing negative volumes as the entire category faces a tough time in 2024. It’s unclear what’s causing the slowdown, but over the long term, energy drinks took a downturn. a lot of traditional drinks like coffee, tea and soda. If I had to bet, I think this trend will continue — especially with sugar-free energy drinks — for the next few decades. This bodes well for Celsius.

CELH Operating Margin (TTM) data by YCharts

The stock looks cheap

At a share price of $32, Celsius shares have a market capitalization of $7.5 billion. That’s about 22 times its trailing operating earnings. While there are concerns about near-term upside for Celsius due to the category slowing in 2024 and PepsiCo’s distribution overload, I think the stock looks cheap at 22 times earnings.

Long-term investors should be confident about a few things. First, Celsius still holds market share in the energy drink category. Second, energy drinks have demonstrated the ability to raise prices without affecting demand. Third, the overall energy drink category has been growing for decades since the rise of Red Bull and Monster.

Take all three of these factors together and I think Celsius can have double digit revenue growth for many years to come. If that happens, investors who bought at today’s prices will be happy to look back in five and 10 years.