2024 has been a rough year for Celsius Holdings (CELH -4.41%). The maker of healthier sugar-free energy drinks posted a revenue slump last quarter amid increasing competition and a changing strategy with its largest distribution partner. Shares have fallen a whopping 70% from all-time highs set just a half-year ago, causing immense pain for shareholders who have held on this year.
This short-term pain should be seen as an opportunity for patient investors focused on long-term gains. Here's why growth stock Celsius Holdings is a buy for investors as we head into the holiday season.
Market share stagnation, PepsiCo distribution headwind
Celsius stock has gone in the tank for a few reasons. First, we should note that the stock was trading at a price-to-earnings ratio (P/E) of over 100 earlier in 2024. Any stock trading at a nosebleed P/E is going to be risky, no matter how fast the company is growing sales.
Speaking of which, that brings us to the second reason Celsius stock has faltered this year: slowing revenue growth. After posting huge double-digit revenue growth figures for many years, Celsius went into a big slowdown in 2024. Each quarter saw successive deceleration in revenue growth, with revenue actually falling 31% year over year last quarter.
Now, this huge revenue drop is not as bad as it seems. Celsius has a major distribution deal with PepsiCo, which decided to trim its inventory levels for the energy drink brand this year. Ingesting less inventory meant a temporary hit to Celsius's revenue. The brand didn't lose 30% of its market share in one quarter.
The market share story is not pretty, though. After years of market share gains in the energy drink category, Celsius seems to have stalled out at around 12% market share in the United States in 2024. Time will tell whether this stagnation is a ceiling for Celsius, but investors are clearly worried. There is increasing competition from upstart brands like Alani Nu and Ghost that are eating into the sugar-free energy drink market once dominated by Celsius.
Long-term international growth, category tailwind
Celsius is facing headwinds in multiple areas right now. That doesn't mean they will be permanent. The inventory issues with Pepsi should resolve within the next few quarters. Then, the company's revenue will line up with actual sales from retailers to fans of the product.
Brand competition is fierce, and investors shouldn't bank on Celsius gaining market share like it did before 2024. No consumer packaged good category is a monopoly -- there will always be other energy drink brands out there.
There are some long-term tailwinds that should help Celsius grow over the next five years. The brand is only just expanding to international markets, which now include English-speaking countries and France. International revenue grew 37% year over year last quarter, which investors should expect to continue in upcoming years.
Overall energy drink sales keep growing, taking share from traditional drink sources such as coffee, fruit juices, and soda. If Celsius keeps its market share, this sector tailwind should help it grow revenue over the next few years.
Last, we shouldn't forget the steady price increases consumer packaged food brands can implement year after year. A pack of 12 Celsius cans is currently going for around $20 on Amazon. Celsius will be able to raise prices to $21, $22, and eventually higher on its energy drink packs in the years to come and will likely get little customer pushback. These are simply not expensive items if people incorporate such products into their daily lives.
CELH PE Ratio data by YCharts.
Why the stock is a buy right now
Add up these three growth drivers -- international expansion, category growth, and pricing power -- and I think Celsius can produce 10% annual revenue growth over the next five years. Extrapolating from its current trailing revenue of $1.37 billion, Celsius will be doing $2.2 billion in sales five years from now.
Assuming the company can reach similar profit margins to Monster Beverage of 25%, Celsius will be generating $550 million in annual earnings in five years, which would bring its P/E down to 12.4 compared to the stock's current market cap of $6.8 billion. The average P/E ratio for the S&P 500 (^GSPC -1.11%) is 31 today.
If you believe in the Celsius growth story, the stock is likely a buy for those looking to hold for at least five years or longer, after falling 70% from highs.
