Shares of Celsius Holdings (NASDAQ: CELH) have been in a free fall of late. The energy drink company's growth rate has been slowing and with the stock trading at a high premium, it has had some difficulty attracting and retaining growth investors. A year ago, the business was growing at a rate of 112%. Now, it has slowed to just 23%.
Ultimately, choosing to buy the stock or not could come down to whether you think its growth rate will continue to slow, or if there could be enough positive catalysts to help it accelerate in the future. Here are three reasons why the growth rate could improve, and one reason why it might not.
It still sees promise in the sugar-free energy drink market
As consumers become more health conscious, there is more attention on sugar-free products. And CEO John Fieldly sees it as a big opportunity, noting on the company's recentearnings call "Sugar-free has now been 50% of the energy drink category for the first time." And Fieldly sees this being a great growth opportunity for the business with Celsius having the "second largest brand" in that category and "leading the sugar-free growth movement."
According to analysts at Mordor Intelligence, the sugar-free energy drink market will be worth approximately $24 billion by 2030, growing at a compound annual growth rate of just under 6.4% until then.
It is expanding into more international markets
Celsius has been growing its business outside of the U.S. and international markets present a huge opportunity for the company in the long run. In addition to launching its products in Canada this year, the company has also commenced sales in the U.K. and Ireland in recent months. It also expects sales to begin in Australia, New Zealand, and France during the second half of this year.
The company is in the early stages of its international growth and there's plenty more room for the business to become much bigger in the long run. In Celsius' most recent quarter, which ended on June 30, international sales totaled $19.6 million and rose by 30% year over year. That is, however, still a fairly small slice of the $402 million in revenue the company generated during the most recent period.
It has a great partnership with PepsiCo
Beverage giant PepsiCo invested $550 million into Celsius two years ago and has helped the energy drink company with the distribution of its products. By being able to tap into PepsiCo's experience and distribution network, Celsius can be on a much stronger path forward and navigate adverse market conditions than if it were to go it alone, particularly as it eyes global expansion.
Earlier this year, the companies announced that PepsiCo would be Celsius' exclusive distributor in Canada, expanding their distribution agreement. As these companies continue to work together, the partnership could help Celsius achieve strong growth numbers in new markets.
A recession could slow Celsius' business down
The biggest risk for Celsius and any other growth-oriented business is that economic conditions may worsen in the U.S. and around the world in the coming months. That could significantly slow down the company's growth rate. If there's a recession in a key market like the U.S. that impacts consumer spending, that could have a significant and detrimental impact on sales.
The good news, however, is that would likely only serve as a temporary headwind for the business, but it could nonetheless be a key reason why Celsius' growth rate slows down in future quarters.
Is Celsius stock a good buy?
Shares of Celsius are down a staggering 58% in just the past three months as investors have been rushing to sell shares amidst its slowing growth numbers. But with the beverage stock still trading at 40 times its trailing profits, it arguably isn't a cheap buy despite this sudden drop in value; a sell-off may have been overdue.
Celsius does still possess promising growth opportunities that could lift its valuation much higher in the years ahead. But at such a high premium, I would hold off on buying it for the time being, at least until it can show that it is indeed experiencing a higher level of growth and that those international opportunities are paying off for the business.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
