By disrupting the energy drink duopoly owned by Red Bull and Monster, functional energy drink upstart Celsius (CELH 1.25%) has grown to account for 11.5% of its industry's U.S. sales -- becoming the only new brand to reach this mark in the last decade.
Now firmly the No. 3 brand in the energy drink space, Celsius is larger than the No. 4 and No. 5 labels combined. It's grown from a mere 3.5% share of its category two years ago to its current double-digit level, and the company has seen its share price more than double since 2022.
Now, with the company's share price down 35% over the last month due to short-term worries, the time looks right to buy Celsius, thanks to these four key reasons.
1. Celsius is unlocking new opportunities with PepsiCo
After signing a massive agreement with beverage giant PepsiCo (PEP -0.36%) in 2022, Celsius finally gained the distribution heft it needed to launch its sales into full hypergrowth mode. It averaged triple-digit sales growth in the two years following the deal. The company has picked most of the low-hanging fruit after joining PepsiCo's network. However, there should be plenty of growth remaining in this distribution agreement.
First, building upon its land-and-expand strategy, Celsius now looks to execute the "expand" portion of this game plan by growing the display space it has in all the new stores it recently entered with PepsiCo's help. In highlighting this point in its first-quarter 2024 earnings press release, management explained: "We estimate that retailers' spring shelf resets were approximately one-third complete as of March 31st, and once concluded, we are expecting our best shelf space gains in company history."
At an investor conference on June 11, CEO John Fieldy explained that labor shortages have led to delays on these shelf resets, but that gains should be evident over the summer and fall quarters.
Second, partnering with PepsiCo has opened Celsius up to the food service channel. Case volume for this vertical grew by 186% in Q1 and already accounts for 12% of Celsius' total sales made to PepsiCo. Not only will this burgeoning channel bring sales growth, but it should also increase brand awareness for Celsius drinks as they continue to become more common across a broader array of locations.
Image source: Getty Images.
2. Top-notch margins
What makes Celsius' incredible sales growth over the last few years all the more impressive is that it already boasts a 19% net profit margin. While this profitability is relatively new, with the company only breaking even in 2023, it already ranks favorably compared to some of its massive beverage peers -- an incredible feat considering the company's rapid growth.
CELH Profit Margin data by YCharts
This robust net profit margin is a promising sign for shareholders, as high profitability tends to indicate pricing power for brands with loyal customer bases.
In addition, reaching profitability means that Celsius is now self-sufficient regarding its growth and will have excess cash to spend on potentially rewarding shareholders or expanding internationally.
Speaking of which...
3. International growth ambitions just starting
After signing several distribution agreements with Japanese beverage giant Suntory early in 2024, Celsius plans to expand into Australia, New Zealand, the U.K., Ireland, and France. Similarly, the company recently started selling in Canada after expanding its distribution agreement with PepsiCo.
With international sales only accounting for 5% of the company's total revenue, these foreign markets could represent the next chapter of the Celsius growth story. To put the length of this growth runway for Celsius in perspective, consider that energy drink peer Monster generated 37% of its total sales from international markets in the fourth quarter of 2023.
The company generated $16 million in international sales in its latest quarter, compared to Monster's $637 million. Celsius could have decades of growth remaining in front of it should it continue to disrupt the energy drink industry globally.
4. A more reasonable valuation
With the company's share price down 35% in the last month due to short-term worries about a few weeks of sales data, the time might be right for long-term investors to reconsider adding to their Celsius position. While the company still trades at a lofty 57 times forward earnings, this is much more reasonable than the mid-80s figure it traded at one month ago.
CELH PE Ratio (Forward) data by YCharts
While this is nearly three times the S&P 500's forward P/E (price-to-earnings) ratio of 21, analysts expect Celsius to grow its bottom line by 40% in 2024, compared to just 9% for the index as a whole.
Ultimately, despite its premium valuation, the four factors listed here show that Celsius still has plenty of room to run -- but investors should be ready for a turbulent ride along the way.
