Investors are worried about a growth slowdown and a recent investigative report on the health impacts of energy drinks.
Celsius Holdings (CELH -3.88%) is up around 25,000% in the last 10 years. The stock is also currently inflicting pain on shareholders, with shares down 46% from recent highs set earlier in 2024. This is one of its worst drawdowns ever and has the stock at its cheapest earnings multiple in recent memory.
The upstart energy drink brand has gained a ton of market share in the United States and is expanding internationally. However, investors are worried about a short-term pull forward in inventory and a recent report from the Wall Street Journal regarding the energy drink and eating disorders. Is the the stock a buy-the-dip candidate for the second half of 2024?
Rapid growth, profit inflection
Taking the United States by storm with its healthier energy drinks, Celsius burst onto the scene a few years back with its sugar-free energy drinks and never looked back. With a pitch as a healthier caffeine beverage for those looking for an active lifestyle, Celsius has taken share in the energy drink category from legacy players like Monster and Red Bull by getting more women and exercise-focused consumers to become regular customers.
Revenue growth has been astounding. Five years ago, Celsius had revenue well under $100 million. Over the last 12 months, it has generated $1.4 billion in sales. Now, it is starting to expand internationally. It has entered six new countries in 2024, including Spain, the United Kingdom, and Australia, with plans for more countries in the future. If it has similar success to the United States, these new countries can drive revenue growth for many years to come.
Celsius is also generating more profits, even as sales grow at a fast clip. After remaining at breakeven or negative for years, operating income has risen to $302 million over the past 12 months, which is a margin of 21.5%. These strong economics are a key reason why Celsius stock is up 25,000% in the last 10 years.
So, if the numbers look so good, why is the stock down 45% in 2024?
Eating disorders and inventory concerns
Investors have been concerned about Celsius building up too much inventory at retailers in recent quarters. The company partnered with PepsiCo to hop on its distribution network and get better shelf space at retail locations around the country. Plus, now it doesn't have to ship its inventory around the country itself; it can outsource this expensive step in the supply chain to a more experienced partner.
When Celsius sells its product to Pepsi, it counts that sale as revenue. Then, Pepsi sells Celsius to retailers. However, Pepsi is now saying that in late 2023, it took on too much Celsius inventory for the amount that was sold to consumers, which inflated Celsius's sales in those quarters. Now, Celsius is paying the price, with its revenue growth slowing to 37% compared to over 100% a few quarters ago as Pepsi works through this temporary oversupply. While not a long-term concern, Wall Street has reacted to this development by selling off the stock.
Recently, the Wall Street Journal reported that young girls with eating disorders have frequently used energy drinks such as Celsius to suppress their appetites. This is a recent story, and it is causing some uncertainty about Celsius, although it is unclear whether this is actual news or just noise. Either way, investors got nervous and sold the stock off another 10% after the report dropped.
CELH PE Ratio data by YCharts
Should you buy the dip for 2024?
Even though Celsius is down 45%, the stock still has a sizable market cap of $12.2 billion. That gives it a trailing price-to-earnings ratio (P/E) of 58, which is around double the market average. In a vacuum, this looks expensive.
Just because a stock has a trailing P/E of 58, that does not automatically make it something you shouldn't buy. Celsius has grown quickly and should continue to do so in the years to come. Even if revenue growth slows down further below 37%, Celsius has plenty of room to work into this high P/E.
But investors should also consider the risks around the eating disorders report and inventory buildup at Pepsi. Putting the positives and negatives together, I still don't think Celsius stock is a good buy at the midpoint of 2024. Keep this high-growth stock on the watchlist for the time being.
Brett Schafer 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.
