Celsius Holdings: Buy When Everyone Hates It (CELH)

This is my third time writing about Celsius Holdings, Inc. (NASDAQ: CELH), and it seems that now that everyone hates it and the price leads the narrative, it is worth reflecting again, more calmly, on all things bad and good (and there there are several) that happen to the company.

The truth is that since my last article, things have gone pretty bad, but that just goes to show the difficulty of market timing. Personally, I think we’ll see Celsius stock hit new all-time highs again, and the returns investors can get from current prices could exceed 20%. However, I have already discussed my valuation and price targets in the previous article. This will be more of an update on everything that has happened so far, highlighting the last two conferences in particular.

Presenting at the 17th Annual Barclays Global Consumer Conference, 04 September 2024.

Piper Sandler Growth Frontiers 2024 Conference, September 10, 2024.

Things that went wrong

Let’s start from the beginning. There are two main reasons why Celsius shares have fallen so much, although we could say that the high valuation it experienced five months ago could be the third, but that falls outside of the operational business.

The first reason was the negative sales growth experienced by many companies in the sector. This is something unprecedented in the history of the industry. In fact, in my first article, I mentioned that this was one of the few industries that I prefer to value using EV/Sales because the costs of raw materials, freight, shipping, etc., are cyclical, not their sales. They say there’s always a first time, and now it’s the energy/functional drinks sector’s turn.

And for the first time in a while, that affects our category, the energy category. You’ve seen some of the top players go into negative growth for the first time in what seems like a generation.” Toby David, EVP.

Still, there are reasons to be optimistic. For example:

we were resistant. We’re up 10% quarter-over-quarter, year-over-year. That’s 10 times the category’s year-to-date growth rate. So we feel very strong about where we are positioned today” Toby David, EVP.

This sector weakness is mainly due to the decline in the convenience store channel, which typically accounts for around 65% of the sector’s sales. Other companies, such as Alimentation Couche-Tard (ATD:CA) (OTCPK:ANCTF), also highlighted this in their earnings presentations.

Unfortunately, right now, much of that space has gone into convenience, and convenience is being challenged. You see a lot less foot traffic in convenience, I think 4% you see in 7-Eleven and many others.” Toby David, EVP.

But again, there is still positive news within the negative:

we saw a 39% increase in shelf space within the convenience store channel, where a significant portion of energy drink sales come from, particularly with Red Bull and Monster. We have ongoing meetings with retailers for 2025, and these meetings are very positive because of the incremental value that Celsius brings to the category, attracting a different consumer, not just rebranding. In addition, the basket value that Celsius brings is very important for retailers as well. Therefore, we drive more dollars per cart than most of our competitors.” Toby David, EVP.

We’ve come to the bottom line: the inventory problem with PepsiCo ( PEP ), its main customer and its distribution partner. For several quarters, there has been a negative impact on Celsius’ sales due to Pepsi’s inventory management. For those who don’t know, Celsius recognizes sales when they deliver products to Pepsi, but Pepsi, as a distributor, will recognize sales when they sell into the retail, food service, etc. channel. (which I have seen is weak).

So even though the retail channel might be performing well, it doesn’t necessarily mean that Celsius is selling more. Instead, Pepsi is likely to offset its inventory from last year’s overbought. The impact was between $100-120 million in Q3 year-over-year, a much higher figure compared to $20-30 million in previous quarters. However, we see that Celsius continues to be the fastest growing brand in the category, indicating that Pepsi is running out of stock and that this situation will be temporary. It reminds me a bit of what’s going on in the alcohol industry and the problems the big players are having with de-stocking their distributors.

In Celsius’ defense, this is something completely beyond the company’s control. If we want to think negatively, we might even consider whether Pepsi did this on purpose to strengthen its position against Celsius. Some say that Pepsi might buy the whole company, but I don’t think so.

Recall that the Pepsi stake was purchased at $25 in 2022. Could this be a potential floor for Celsius’ share price? Looking at more of his numbers, a CELH USD price of $25 would imply an EV of $5.1 billion, which would require paying quite a premium. In my opinion, Pepsi could buy up to 20% as their original 8.5% purchase could be doubled… In addition, The Coca-Cola Company ( KO ) bought a 16% stake in Monster Beverage (MNST) at one point and now owns 20% due to buybacks.

Even so, this would be one of the two catalysts I’m most looking forward to. The second would be the launch of a range of drinks with no (or less) caffeine, which would significantly increase Celsius’ consumption and total addressable market.

Positive aspects

Having gone through the negatives and considering that it’s not all that bad, I’ll now focus on the remaining positives.

They are number 2 (number 1 is Monster) in the sugar-free category with a 25% market share. The sugar-free segment now accounts for over 50% of the total category. Year-to-date, the sugar category is down 4%, while the sugar-free category is up 7%. And the announcement of new countries is coming soon.

They also saw a 39% increase in convenience channels, and as mentioned earlier, appointments for 2025 are doing very well.

Another key point is that the category is not losing consumers; it’s just changing the format in which they buy (eg 12-24 packs which lowers the unit price but increases the volume, which really matters to me) and the frequency with which customers buy.

So providing that space is really essential for us. And when the category starts to come back – which it will – I think it’s important to understand that the category is not losing consumers to other categories. If it were, it would be much more worrying. With all of these space gains, we really feel like we’re well positioned for 2025. As I mentioned earlier, we already have meetings with the largest retailers in the country for 2025 to see how much space we expect to gain, and the meetings so far they’ve been very positive.” Toby David, EVP.

And what we’re doing is really the big — the next big opportunity for us is NACS in October, the national convenience store show. And if you look at the data and you look at the convenience, we’re driving that growth in the category. So it puts us in a growth engine position. So we’re going to have a great story in these retailer meetings coming up over the next few months.” John Fieldley, CEO.

They will change the way they calculate and display market share, as it previously did not include sites where they perform better than the competition, such as Amazon or Costco. “So we feel that MULOC+ really gives us better visibility into the overall health of the brand. We currently have around 11.8% market share. We’re doing extremely well on Amazon, ranking between 1 and 2 in the energy category.” John Fieldley, CEO. This is not necessarily a positive thing, but it is a better reflection of reality.

They go on to emphasize one of the most important points of the thesis, which is how Celsius expands the TAM of the category by reaching niche markets where traditional energy drinks have never succeeded.

Over 12% of our Pepsi revenue comes from the food service sector, including hospitals, universities, Lowe’s, restaurants and casual fast food. What’s interesting about Celsius and Pepsi – who are also surprised and excited about this opportunity – is that many of you here are having lunch while also drinking a Celsius, which is unique. It expands the usage opportunity for the energy category.” John Fieldley, CEO.

Not to mention that in over 10 markets, including Boston, New York and Florida, they have over 15% market share. Let’s remember that on Amazon, where it competes on an equal footing with its competitors (without shelves or refrigerators…), it has a market share of over 20%.

They will also be one of the main sponsors of the fight between Jake Paul and Mike Tyson, which is already shaping up to have a big impact. Additionally, it will be the first live event to be streamed live by Netflix ( NFLX ). There will be many eyes on her. Additionally, they sponsor Jake Paul, whose brother is the founder of Prime hydration drink. They expect that over time, marketing spend will reach a certain operating leverage and represent a smaller percentage of sales.

Here’s what they mentioned: Finally, they gave some very interesting details about how they’re expanding into new countries. First, they are entering gyms, as we already know, and gradually expanding to a few retail locations such as Tesco (OTCPK:TSCDF) through exclusive deals. These contracts provide better shelf space and benefit from larger scale marketing from these larger supermarkets.

Second, if they entered multiple retail locations at once, inventory logistics would be much more difficult, and some places might run out of stock. This could cause those locations to remove the product due to a poor experience with the distributor.

They also noted that unlike Monster, which has a significant margin difference internationally because it relies 100% on Coca-Cola distribution, Celsius can choose other distributors, not necessarily Pepsi. This is what they did with Suntory in the UK. They expect not to have such a large margin between different geographies.

Conclusion

That was all that happened in the last few months. Despite the fact that many things are more complicated than I thought, I see that what is completely dependent on management and business continues to perform better than the rest of the category. Could it fall further? Perhaps if the impact on Q3 numbers is bigger than expected, it could drop to the $25 mentioned, but I see no reason why the thesis won’t work in the long term.