Celsius Holdings (CELH -4.41%) lost 70% of its value earlier this year. Its red-hot revenue growth suddenly turned negative as a key distributor, likely PepsiCo, dramatically pulled back on orders.
However, a closer analysis shows that the lower level of orders is probably an effort by the distributor to right-size its order quantities. Moreover, between a discounted valuation and a key untapped market, a 10x move in the stock might turn into a conservative estimate for gains. Here's why.
The current state of Celsius
Celsius has prospered under the leadership of CEO John Fieldly.
Unlike its other large competitors, Celsius places an emphasis on natural ingredients, calling itself the "better-for-you, zero-sugar alternative" to the energy drinks of the past. Fieldly leveraged that difference to build a following among fitness enthusiasts.
Also, health awareness has grown in recent years. Assuming Robert F. Kennedy Jr. wins confirmation as Health and Human Services secretary, artificial ingredients are likely to come under scrutiny, which could amount to a competitive advantage for Celsius and further increase its sales.
Furthermore, Fieldly made a deal that supercharged its sales beginning in 2022 when Celsius signed a distribution deal with PepsiCo. This has dramatically increased sales, so much so that Celsius has become the third most popular energy drink in the U.S., lagging behind only Red Bull and Monster Beverage.
Data source: Statista.
Factors that could boost Celsius' stock price
Nonetheless, merely taking market share from Red Bull and Monster is unlikely to make the stock grow tenfold. Investors should also consider these two critical factors.
One is its valuation. Admittedly, Celsius' P/E ratio of 39 has fluctuated in recent years. However, it sells at a price-to-sales (P/S) ratio of 5. On average, it has traded at 15 times sales over the last five years, implying a 3x gain if it returns to that average level.
Even if the triple-digit sales growth and the higher sales multiplees do not return, investors should look to its largely untapped potential abroad to take the stock to 10x growth. Fieldly has worked to make Celsius' energy drinks available in the Asia-Pacific region and Europe.
The financials show why this is necessary to continue its massive growth. In the first nine months of 2024, its sales of $1 billion grew by 5% annually, far below the 104% growth during the same time frame in the first three quarters of 2023. This includes a 31% year-over-year decline in Q3.
Although the U.S. and Canada account for less than 5% of the world's population, those countries made up 95% of Celsius' sales volume in the first nine months of the year. Additionally, sales outside its North America region (meaning the U.S. and Canada) increased by 36%. This shows that the current slowdown in revenue growth did not apply to its markets outside of North America.
This also indicates that its potential for selling in foreign markets is largely untapped. If the company can stoke international sales to the point where North America is under 50% of its sales volume, the company's revenue and profits (and likely its stock as well) should benefit from massive gains.
Buy Celsius stock
Investors should consider the pullback in Celsius stock a buying opportunity that could ultimately bring returns of 10x or more.
For one, it appears investors overreacted by allowing Celsius to fall by 70%. It is likely its distributor will right-size its inventory over time, meaning the considerable reduction in buying is unlikely to happen again.
Moreover, Celsius has just begun to sell its product to the 95% of the world's population outside of North America. If it can make its product significantly more popular in Europe or Asia, the company and its stock could benefit from outsized growth for years to come.
