Why Celsius Holdings shares fell 18% in September

Actions of Celsius Holdings (CELCH -0.02%) were down last month after the fast-growing energy drink maker gave a disappointing sales update on its partnership with PepsiCoand Wall Street analysts cooled on the company.

According to data from S&P Global Market Intelligence, the stock fell 18% in September on the PepsiCo news, as investors’ perception of the once bullish growth stock continued to deteriorate. As you can see from the chart below, most of the stock’s decline occurred earlier in the month with PepsiCo’s update.

CELH data by YCharts.

Demand for Celsius is slowing

Since the pandemic, Celsius had reported several quarters in a row of skyrocketing sales growth, sometimes by triple digits. But that time has come to an end, and recent news from PepsiCo helps explain why.

Celsius stock fell 11.6% on September 4 after it said PepsiCo had overstocked its product, and sales are now down as its closest distribution partner cuts orders to optimize the stock.

Celsius said underlying sales trends remain strong in the third quarter, with sell-offs and sales up 10% in the third quarter. However, sales to PepsiCo are expected to fall anywhere from $100 million to $120 million for the quarter, which will significantly hurt its bottom line.

In addition to the warning from PepsiCo that it appears to have overestimated demand for Celsius, there is some concern that the energy drink market is finally maturing after years of strong growth.

Monster Drinkthe category leader, reported a 6.1 percent rise in constant currency revenue in the second quarter, or 7.4 percent excluding its alcohol brands, an indication that growth in the category appears to be slowing.

Analysts welcomed the update on PepsiCo by lowering estimates and cutting price targets for Celsius shares. And Jefferies said Red Bull is taking market share from Celsius with new flavors. Analysts also bet the company would ramp up promotions in response to intense competition in the energy drink market, which would further hurt results.

finally, Morgan Stanley said growth for Celsius continued to decline in September, with scanner data showing sales rose 7% to 8% for the two weeks ended September 21.

Image source: Celsius.

What’s next for Celsius?

The good news for investors is that after a difficult few months, Celsius shares look like a much better value, trading at a price-to-earnings ratio of 31.

Investors should expect an ugly third quarter, as the consensus is now calling for a 25% drop in revenue and a sharp drop in earnings per share, but PepsiCo’s reset shouldn’t hurt the stock over the long term.