After weeks of pondering the decision, I finally made a move into Celsius Holdings (NASDAQ: CELH). Shares of the energy drink maker made massive gains under the leadership of CEO John Fieldly, highlighting his abilities to develop a following in the fitness community and score a lucrative distribution agreement with multinational behemoth PepsiCo.
Nonetheless, the beverage stock has pulled back significantly this year. It is in this environment that I bought Celsius shares, and three reasons explain why.
1. An increased emphasis on natural products
As mentioned, part of Celsius's competitive advantage came from its rising popularity among fitness enthusiasts. Unlike competitors, such as Red Bull and Monster, Celsius emphasizes natural ingredients such as green tea extract and ginger root. It also derives its caffeine source from guarana seeds, which have more than twice the caffeine of coffee beans. This approach has made it the third-most-popular energy drink in the U.S.
Image source: Statista.
2. Inventory issues are likely temporary
Despite improving sales prospects for nature-based products, Celsius stock has fallen more than 70% from its high amid an inventory glut. A major Celsius distributor, likely PepsiCo, lowered its purchases to reduce inventory.
Consequently, in the third quarter of 2024, revenue dropped 31% from year-ago levels. So important was this drop that its revenue for the first nine months of 2024 totaled $1 billion. That's an increase of just 5% compared to the same period in 2023, and far below the 104% yearly growth rate in the first three quarters of 2023.
Moreover, net income for the first nine months of 2024 amounted to $131 million, 7% less than 12 months ago. That occurred amid a 31% increase in selling, general, and administrative expenses. The effect was particularly severe in the third quarter, as the most recent quarter earned Celsius only $1.5 million in net income.
However, Fieldly also stated in the Q3 earnings report that the supply chain optimization challenges with its largest distributor have "largely stabilized." While shareholders should still pay attention to that issue, signs of growth returning should help the stock.
An increase in international sales could boost revenue even more. Non-North America sales were only 5% of revenue in the first three quarters of 2024. That was up from 4% during the same timeframe in 2023, as its non-North American revenue rose 37% during the same period. This means the international market is largely untapped, pointing to the potential for more revenue growth longer-term.
3. Valuation
The current challenges mean that investors can buy Celsius stock at a significant discount. Due to the stock's sharp pullback of over 70%, investors can buy shares at a price-to-earnings (P/E) ratio of 40. While that may sound high, this is far below the average 69 earnings multiple over the last year and represents an attractive level if the stabilized supply chain helps lead to a return of sales growth.
The company's price-to-sales (P/S) ratio appears to confirm this thesis. The current sales multiple of 4.9 is far below the 9.6 average over the last year and the 14 average in the last five years. This implies a massive discount for a stock that is more than likely experiencing a temporary growth setback.
Making sense of Celsius stock
Considering the current state of Celsius stock, I believe I bought it on a likely overreaction to the supply chain disruption. Indeed, less purchasing from its largest distributor is concerning. Nonetheless, that is likely a temporary setback, and its small but fast-growing international segment bodes well for its future in the long term.
Moreover, growing emphasis on natural products should help highlight its competitive advantage. When also considering the heavily discounted stock price and valuation metrics, buying Celsius stock was an easy decision.
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Will Healy has positions in Celsius. The Motley Fool has positions in and recommends Celsius and Monster Beverage. 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.
