The stock market might be the best tool available to build long-term wealth, but it's fraught with volatility. Even the best-performing businesses deal with this roller coaster ride.
Look no further than Celsius (CELH 6.40%). The unstoppable beverage stock has skyrocketed 5,390% in the past five years, outpacing even a top performer like Nvidia. But shares are down a notable 25% after hitting a local peak last month.
If you're looking to energize your portfolio, you might be ready and willing to buy this beaten-down growth stock right now. Continue reading to learn if that's the right move.
Celsius' remarkable growth
The key factor propelling Celsius shares higher is undoubtedly its rapid growth. Between 2018 and 2023, revenue increased at a compound annual rate of 90%. In other words, Celsius' annual sales nearly doubled each year for half a decade. I don't know if you'd find a business expanding at an unbelievable clip like that. By marketing its energy drinks as functional beverages with health benefits, Celsius has caught on in a major way.
I can identify one major catalyst that has helped the company get to this point. And it could continue to provide a boost over the long term.
The key has been to get Celsius products into more retail sales channels, meeting consumers where they are by increasing accessibility, convenience, and exposure. Formerly rare on retail shelves, its drinks can be found in grocery stores, gas stations, fitness centers, and in many other places today.
Last year, PepsiCo (PEP 0.37%) became the company's domestic and international distribution partner. Celsius will be able to lean on the global food and beverage giant to further expand its reach.
Moreover, it can be a true game changer if a consumer brand can find major success on Amazon. The e-commerce juggernaut has billions of website visitors each month, with nearly 40% of all online shopping in the U.S. going to the site. Last year, Celsius was the top-selling energy drink on the online marketplace.
It's not reasonable to expect that near triple-digit growth rate to continue indefinitely. Indeed, Wall Street analysts believe sales will rise 42% this year followed by a 32% jump in 2025. If these forecasts come true, those are still impressive gains.
Businesses that grow this rapidly usually sacrifice profitability. That's not the case here. Celsius reported a 20% operating margin in 2023, after years of consistently losing money. Shareholders hope this positive trend will continue on the backs of better leveraging fixed costs.
Sky-high expectations
It's hard to find fault with Celsius' financial performance up to this point. However, investors should think twice before scooping up the stock. Even after its recent dip, shares trade at a forward P/E ratio of 65. I still think this is an extremely expensive valuation.
The market fully appreciates Celsius and what it has accomplished thus far. Therefore, the stock is priced for perfection with no margin of safety. When expectations are this high, suggesting that the business can do no wrong, it adds sizable downside risk to the equation. Even if Celsius were to miss Wall Street's revenue estimates by a tiny amount, shares would likely tank.
This points to the fact that it's always better to buy a business when expectations are tempered somewhat. Celsius has the opposite situation. Therefore, I believe the valuation is going to come down considerably over time, creating a powerful headwind for investors seeking market-beating returns.
There's also a lot of uncertainty around Celsius' durability. Consumer tastes are notoriously fickle, health fads come and go, and there are no barriers to entry for new rivals who want to enter the energy drink market. I'll gladly pass on this pricey stock until there's a drastically milder valuation and clearer long-term certainty.
