Question: Why would you pay 7 times revenues for Coca-Cola stock (NYSE: KO) when you could buy Celsius Holdings stock for 6 times sales? You wouldn’t, especially when you consider three simple facts:
- Growth: Celsius’s revenue is growing at a much faster rate, over 70% annually in the last three years, while Coca-Cola’s revenue growth is just around 7%.
- Profitability: Celsius’s operating cash flow margins are above 19.4%, versus 14.5% for Coca-Cola, meaning a larger portion of their revenue growth translates into actual cash flows for the company.
- Financial Stability: Celsius exhibits a balance sheet with significantly lower debt (0.2% Debt-to-Equity) and much higher liquidity (50.4% Cash-to-Assets) compared to Coca-Cola (14.3% Debt-to-Equity and 14.5% Cash-to-Assets).
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Is Celsius Stock A Safe Bet?
Celsius is not exactly a “safe haven” investment, as indicated by its historical performance during market downturns. To illustrate, consider CELH’s behavior during past economic shocks. During the 2022 inflation shock, the stock experienced a significant decline of over 62%. Similarly, amid the pandemic uncertainty of 2020, CELH stock fell by over 51%, considerably exceeding the S&P 500’s peak-to-trough declines of 25% and 34%, respectively. Therefore, based on this historical data, CELH stock does not appear to be a reliable safe investment, especially during periods of market stress. Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.
It’s important to note that Celsius stock has demonstrated strong upward momentum, experiencing a substantial rally of over 30% year-to-date. This performance significantly outpaces the broader S&P 500 index, which has declined by 4% during the same period. However, for investors seeking a potentially more stable yet high-performing alternative, consider the Trefis High Quality portfolio. This strategy has outperformed the market with over 91% returns since its inception, as demonstrated by its HQ performance metrics.
Celsius Is Poised For Strong Growth In Functional Energy Drinks
For investors bullish on the long-term growth and widespread acceptance of functional energy drinks, irrespective of commodity price volatility, Celsius Holdings could be an attractive long-term investment at its present valuation. This is mainly because Celsius is a significant disruptor in the transforming energy drink market. Instead of focusing on the success of individual legacy brands like Monster, Red Bull, or PepsiCo, investing in Celsius is essentially a wager on the increasing consumer preference for healthier, functional energy options across all major distribution networks.
Considering that the functional beverage market is still expanding, retailers and distributors are currently dedicating considerable shelf space to this important category. The scale of investment in this sector is evident in examples like PepsiCo’s multi-million dollar distribution partnership, highlighting the substantial ongoing commitment to the functional energy drink space.
In August 2022, Celsius Holdings and PepsiCo entered into a long-term strategic distribution agreement. As part of this collaboration, PepsiCo invested $550 million in Celsius, acquiring an 8.5% ownership stake and becoming its preferred global distribution partner. This agreement provided Celsius with access to PepsiCo’s vast distribution network, significantly expanding its market reach.
This partnership has proven crucial to Celsius’ growth strategy, facilitating increased brand presence in retail locations throughout the United States and with the potential for international expansion. Consequently, the distribution deal with PepsiCo stands as a key element of Celsius’ business model and its ongoing growth trajectory.
Potential Risks to Consider
Despite its compelling prospects, investing in Celsius Holdings carries inherent risks that investors should consider. One potential downside is the possibility of earnings falling short of expectations, or a significant deceleration in growth from the current high levels to a more moderate pace in the near term, if consumer spending on premium beverages tightens.
Another factor to consider is the potential for Celsius’ competitors to increasingly focus on developing their own health-oriented energy drink alternatives, which could lead to market fragmentation and pressure on Celsius’ market share. Additionally, the stock is always susceptible to negative impacts from unforeseen commodity cost increases or regulatory scrutiny around functional beverage health claims.
Given these potential risks, investors should be prepared for the possibility of a substantial downside in the stock price, potentially as much as 40%. It’s important to note that selling during such a significant downturn would likely be counterproductive to long-term investment goals.
Long-Term Perspective
From a long-term perspective, investors with a 3-to-5-year horizon who can tolerate volatility might find CELH an interesting entry point into the expanding functional energy drinks market, even at its current price levels. Trading around $36, CELH stock currently has a price-to-trailing-revenue multiple of 6x, which is below its three-year average of 9x. Furthermore, the average analyst price target of $43 suggests a potential upside of approximately 20% for CELH stock.
For investors aiming to reduce the inherent volatility associated with individual stocks like CELH, there are alternative investment strategies available. The Trefis RV strategy, which has a history of outperforming its all-cap stock benchmark, provides a diversified approach to potentially achieve solid returns. Likewise, the High-Quality portfolio has shown superior performance compared to the S&P 500 with returns that exceed 91% since its initiation, offering potential upside with reduced stock-specific risk.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
