Essential Details to Bear in Mind Before Investing in Celsius's Shares
Essential Details to Bear in Mind Before Investing in Celsius's Shares
The financial market, as indicated by the S&P 500, is having a stellar year. As of Dec. 11, the broad index has surged 28% in 2024, following last year's 24% rise. Market optimism is undeniably high as we gear up for the year's end.
However, not all firms have profited from this bullish atmosphere. Energy drink manufacturer Celsius (symbol: CELH, 5.88%) has experienced a 45% drop in its stock price this year. This slip might present an enticing opportunity for investors keen on capitalizing on the dip.
Before diving in, it's essential to grasp these three key aspects about Celsius.
Emphasis on wellness and performance
The beverage market is incredibly saturated, and energy drinks are no exception. The market leaders, Red Bull and Monster Beverage, set the bar high, but they left a gap that Celsius quickly filled. The market yearned for a prominent brand specializing in healthy, functional energy drinks, free of sugar and artificial additives.
This marketing and product positioning have allowed Celsius to establish a good foothold in the industry. According to Circana, the company holds an impressive 11.8% market share, making it the third most popular brand in energy drinks.
Celsius' remarkable success in recent years, with revenue skyrocketing 25-fold between 2018 and 2023, has certainly caught the attention of rivals. Not only have Red Bull and Monster launched sugar-free options, but new brands, like Zoa and Alani Nu, have found success by emulating Celsius' health-conscious strategy. As a result, the unique selling points that Celsius relies on might start dwindling.
Inventory surplus
I just pointed out Celsius' impressive revenue growth trajectory. It's challenging to find firms that have achieved such remarkable gains. However, growth slowed significantly this year, with sales increasing by only 29% in the first half of 2024 versus the same period in 2023. Naturally, no business can grow indefinitely.
That's not concerning. What's worrying is Celsius' Q3 financial report, which revealed a 31% decline in year-over-year revenue.
The culprit behind this slump is Celsius' key distribution partner, PepsiCo, which drastically reduced orders due to an inventory glut. This oversupply negatively influenced quarterly sales by $124 million, as per Celsius' CFO, Jarrod Langhans.
Management is hopeful that the issue will be resolved. Regardless, this highlights the constant challenges that the company faces: coordinating stock levels to meet consumer demand without overshooting.
Celsius' valuation
Over the five-year period ending in March, at Celsius' all-time high, shares had soared 7,330%. Not many investors would be unhappy with a return like that, turning an initial $1,000 investment into over $74,000.
However, the aforementioned slower growth resulted in a less favorable view by the market. As of now, the stock is 69% below its peak.
Despite this, I believe the stock is overvalued. It trades at a price-to-earnings (P/E) ratio of 41.5. While this ratio is significantly lower than the 124.8 that Celsius commanded in March, it's still a steep price for prospective investors.
I believe the current valuation reflects the hope that Celsius will continue to post impressive revenue and earnings growth for the foreseeable future. This might turn out to be true, but the competitive landscape gives me reason to be cautious. Competition is fierce, new brands are constantly emerging, and consumers enjoy zero switching costs.
The latest price dip has yet to convince me to buy Celsius stock.
Given the current market situation, some investors might be interested in exploring opportunities to invest in underperforming stocks. The energy drink manufacturer Celsius, with a 45% drop in its stock price this year, could potentially be an appealing option for those seeking to capitalize on the dip.
Despite Celsius' impressive market share and revenue growth in recent years, the company is currently facing challenges, such as a decrease in revenue due to inventory surplus caused by its key distribution partner, PepsiCo. This oversupply negatively affected quarterly sales and highlights the continuous challenges Celsius faces in coordinating stock levels.
[Finance, money, investing, Celsius, stock price, underperforming, market, investors]