First, there was the outsized growth of Red Bull in the 1990s. That was followed by the outsized growth of Monster Beverage and Rockstar (acquired by Pepsico in 2020) in the 2000s. With the 2020s underway, the next great energy drink player is shaping up to be Celsius Holdings (CELH -1.07%).
One clear indicator of sizzling interest in Celsius is the massive 614% stock price increases over the past three years and a recently announced 3-for-1 stock split that will be effective Nov. 15.
Considering the rapid price rise, increased valuation, and stock split action, has Celsius stock become too hot to touch, or can investors still profit?
The Celsius advantage
At first glance, Celsius looks like just another seller of energy drinks. In an industry with numerous competitors, that factor does not look like much of a differentiator.
But Celsius stands out in this crowd with its healthier take on the energy drink industry. Celsius emphasizes natural ingredients in its drinks, and the company prides itself on providing non-GMO beverages without high fructose corn syrup, aspartame, sodium, or artificial flavors or colors.
Like the drinks from Red Bull or Monster, Celsius beverages contain high amounts of caffeine. But Celsius stands out by relying heavily on guarana extract as the stimulant. Guarana is a natural source that the company claims can provide a longer-lasting energy boost than coffee.
This "healthier" approach seems to have succeeded, as Celsius has already risen to the No. 3 energy drink brand in the U.S. Its market share now stands at 11%, up from 4% one year ago.
How the stock has moved higher
Additionally, the company has benefited from effective leadership under John Fieldly. Fieldly became CEO in April 2018, and shares have taken off during his tenure. Under Fieldly's leadership, Celsius stock has risen by approximately 4,000%. Given that increase, the upcoming stock split seems like a natural next step in the Celsius bull market.
Still, that growth has made the stock expensive. Its price-to-sales (P/S) ratio has risen to 12. It also trades at a forward P/E ratio of 79, a level that will probably deter most value-oriented investors.
Celsius' improving financials
Admittedly, even growth investors might hesitate to touch this stock without considerable increases in revenue or earnings. Fortunately, its financial situation may offer comfort to those concerned about its valuation. In the first nine months of 2023, revenue was $971 million, rising 104% versus the same period in 2022.
Moreover, the cost of goods sold rose at a slower pace than revenue, and the company cut its operating expenses during that time. With that, operating income turned positive.
Furthermore, interest income surged 13-fold, and income tax expenses rose only modestly. That led to a net income for the first three quarters of 2023 of $177 million, a vast improvement from the $166 million loss during the same time frame in 2022.
Admittedly, Celsius is unlikely to maintain triple-digit profit growth. Still, consensus estimates point to a 51% net income increase in 2024 and a 40% increase the year after. Such growth increases the likelihood that Celsius stock will trade at a premium.
Should you buy Celsius stock?
Given current conditions, Celsius stock is likely a buy for long-term investors. At more than 90 times forward earnings, investors may understandably hesitate when earnings will grow at a rapid but slower rate, and waiting for a pullback might be a wise investment strategy.
Nonetheless, Celsius seems to have differentiated itself successfully in the energy drink market. If Celsius can continue to produce rapid net income growth and market share gains, the beverage stock can move higher over time despite its elevated valuation.
Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius and Monster Beverage. The Motley Fool has a disclosure policy.
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