Celsius Holdings (NASDAQ:CELH), owner of the fastest-growing energy brand in the world, has seen its stock conquer a new all-time high, following a fourth-quarter revenue number that crushed expectations.
In the words of the CEO, the energy drink category is now a three-team race.
Fundamentally, the company is firing on all cylinders, with what might be the best non-AI growth story in the market today. The only question is, as always, valuation.
Introduction To Celsius Holdings
I started covering Celsius on Seeking Alpha back in July 2023, claiming it’s a formidable rival to Monster Beverage (MNST), which was and still is one of the best-performing investments in history.
The investment thesis in Celsius remains quite simple. Celsius is by far the fastest-growing consumer staple business in the world. Celsius continues to take share in the growing energy drink market, and with its unique recipe and exceptional marketing, the company is driving new occasions, leading to an expanded TAM.
So we have a hyper-growth trajectory when it comes to Celsius’s top line, but it’s not the end of the story. As the company relies on the unparalleled strength of PepsiCo’s distribution (PEP) and becomes larger in scale, we’re seeing margins expand rapidly as well.
I believe Celsius is providing investors in 2024 a rare opportunity to feel like what investors back in the nineties felt. With all the old CPG companies out there, which are nowadays mainly reliant on pricing to fuel growth, Celsius is showing us there’s still room for disruption in the sector.
Remarkable Growth & Looking Ahead
In the first quarter that lapped the PepsiCo distribution agreement, Celsius was able to defeat tougher comps and reported revenues of $347 million in Q4, up 95% Y/Y. For the full year, Celsius surpassed $1.3 billion in sales, achieving a third consecutive year of triple-digit growth.
Growth did slow down, but it was still much better than expected, as Celsius beat expectations by $15 million. Naturally, when we look ahead to 2024, growth is going to slow down even more, with current estimates standing at 41% for the full year.
That said, I believe consensus estimates will go up in the upcoming weeks, as analysts adjust to the recent results. In my view, Celsius could achieve 50% growth this year, as recent tracking data shows Celsius is in the 75% growth range.
Furthermore, the company is slightly increasing its marketing investments, and its international growth should accelerate materially after the formal launch in Canada at the beginning of the year.
In addition, I believe the Celsius brand is at the inflection point where it gains significant organic awareness.
And, if that’s not enough, 2024 will be the first year that Celsius is entering after thorough planning and preparation with PepsiCo and have a stronger position with sellers.
Taking all of that into account, I’ll be shocked if Celsius doesn’t beat top-line expectations.
Margin Expansion & Operational Leverage
If we want to nitpick, Celsius did miss EPS estimates by $0.01, as margins came lower than expected due to higher sales & marketing expenses. Still, Celsius generated an operating profit of $266 million in 2023, up more than 6x from the prior year, as margins increased 1630 bps to 20.2%.
Margin expansion was driven by scale advantages in cost of revenues, as well as operational leverage in Sales & Marketing and G&A. Looking to Q1-24, management said margins should remain in line with Q4-23, meaning we should expect operating margins in the 17%-18% range.
This does not mean the margin expansion is over, the stagnation in margins is a result of increased marketing spend as the company launches new geographies, as well as capitalizing on high ROI opportunities, like their Super Bowl ad.
I believe Celsius could reach Monster-level margins in the long term, but it will take time, specifically on the operational front, as Monster is still almost 6x larger in terms of sales.
An Updated Monster Beverage Comparison
As mandated, we have to gauge Celsius’s performance against its most significant rival Monster, which currently remains the top energy brand in the world.
As of 2023, Celsius sales as a percentage of the combined revenues reached nearly 16%. Based on current consensus estimates, which I believe favor Monster slightly, Celsius’s share is projected to reach nearly 19% in 2024. As a reminder, Monster’s numbers include the Bang energy acquisition as well.
Importantly, Celsius reached an overall market share of 10.5% in the four weeks that ended 2023, and according to the CEO, it already reached an 11.5% share in the four weeks that ended on February 11.
Additionally, Celsius surpassed Monster as the highest-selling energy drink on Amazon, with a 19.7% share.
CELH Stock Valuation & How High Is Too High?
So, it’s clear Celsius is killing it. The company continues to beat already very high expectations and consistently takes share from competitors. It is doing so while increasing the TAM and expanding margins.
That’s pretty much a perfect storm. However, it seems that the market is finally pricing the stock accordingly.
In previous articles, we could argue that Celsius is trading below a PEG of 1x. That is no longer the case.
With the price at $81.6 a share, Celsius is trading at a 78x P/E over 2024 projections. Even if we take our own estimates of $2 billion in sales and around 14% profit margins for 2024, it is still around a 67x multiple, on expected growth of 50%.
Compared to Monster’s 7.6x and 6.9x EV/Sales in 2024 and 2025 respectively, Celsius is trading at 10.2x and 7.5x, a significantly higher premium compared to my previous articles.
Despite the higher valuation, if Celsius does deliver on expectations, and reach at least a 20% share in the next five years (and I believe it will, and do it faster than that), then the near-term valuation won’t prevent this stock from providing significant market-beating returns.
As a current shareholder, I’ll share what I believe is the right strategy going forward. If Celsius is a very large portion of your portfolio, and you have attractive alternatives, I’d say Celsius’s stock will be range-bound at least until first-quarter results. Therefore, I would consider trimming my position.
If Celsius is a normal-sized position in the portfolio, I would ignore any near-term noise and focus on maintaining decent exposure, with a long-term target (mine is 2027).
Lastly, if you have no position in Celsius, I’d wait for the stock to come down to the $74 range, which, based on my following base-case assumptions, is the target price for a 12% annual return.
As you can see, if sales grow at a 30% CAGR until 2027, profit margins will be at 19%, and with an exit multiple of 35x, we reach a fair value of $24 billion, which reflects a 12% annual return from a $74 share price, but only 8.5% based on today’s price.
Conclusion
Celsius has one of the most compelling growth stories in the market, as the company continues to conquer share in the fast-growing energy market. With its international expansion still in the very early innings, and its scale advantages only starting to make an impact, I believe Celsius will continue to beat expectations and outperform its peers.
After a 20% surge following another better-than-expected report, I believe investors should realign strategically. While I believe CELH stock still has significant room for upside, the current valuation is much more prohibitive.
I maintain a Buy rating on the company, but encourage investors who don’t have a position yet to wait for a dip, which will inevitably come.