Manufacturer of energy drinks Monster Beverage is an all-time high in the investment world; long-term investors have achieved life-changing returns even though the stock has been volatile at times. Investors hope that Celsius Holdings (NASDAQ: CELH)another energy drink manufacturer that has already gained more than 21,000% in value over the last decade is still able to make high profits.
However, the share price has fallen by over 60% this year, leaving investors wondering whether Celsius’s best investment years are behind it.
So should investors buy, sell or hold the stock? The facts provide a clear answer to this question.
Celsius’ best growing times are over, but that’s OK
Celsius mainly sells energy drinks aimed at active and health-conscious customers. Celsius products do not contain sugar, but additional vitamins and natural nutritional supplements.
The company has been around for some time, but the brand’s popularity exploded during the pandemic. Then, in mid-2022, beverage giant PepsiCo announced a strategic investment of $500 million that included distribution support and dramatically increased Celsius’ presence in stores and other points of sale. This initial boost from PepsiCo’s support drove year-over-year revenue growth to over 175%.
Growth slows down over time. It’s difficult to top such strong growth next year, and Celsius is no longer small; annual revenue is approaching $1.5 billion:
The slowing pace of growth is probably the reason why the stock has fallen from its peak. But that’s OK. Second-quarter results suggest business is going well. Data shows Celsius contributed 46.5% to the overall growth of the U.S. energy drink market this year, the most ever. In other words, Celsius is growing faster than the broader energy drink market because it is taking market share from competitors.
In addition, Celsius is just beginning to grow in international markets, which could ultimately fuel company-wide growth as it matures in the US. For example, sales outside North America were less than 5% of total sales in the second quarter. Celsius only launched in Canada in January and in the UK and Ireland in April, with plans to launch in Australia and France before the end of the year.
Even though the days of triple-digit sales growth are probably over, Celsius still has a lot of expansion ahead of it.
Are share buybacks imminent?
Celsius is now comfortably profitable and has more than enough cash to invest in expanding its global presence. The company generated free cash flow of $246 million last year, enabling Celsius debt-free Balance sheet shows cash on hand of over $900 million. Cash represents more than 10% of the company’s current market capitalization.
This puts the company in an exciting position.
Management will likely have to decide soon what to do with its growing cash pile. One option could be to buy back shares, reducing the number of shares and thus increasing earnings per share. Share buybacks generally help to increase a company’s share price over time. Remember, Celsius is still growing its revenue at a double-digit rate, so this combination could yield big gains.
Buy, sell or keep Celsius shares?
Celsius is probably just coming out of its young company phase, but it may be at a point where it is still growing and profitable enough to share its profits with investors.
At this point, investors can sensibly use earnings to value the stock. Today, Celsius trades at 37 times its expected 2024 earnings. Meanwhile, analysts expect Celsius to grow its earnings at an average annual rate of 31% over the next three to five years.
This seems realistic if Celsius can sustain annual revenue growth of 20% or more over the next few years. Through the first half of 2024, revenues companywide grew 29% year over year, so there is still plenty of revenue momentum. The company’s increasing contributions to overall growth in the energy drinks category should also give investors confidence that consumers want the Celsius brand.
Assuming this continues and Celsius grows in line with expectations, the stock’s pullback has become attractive. Long-term investors should have no problem paying 37 times earnings for a company that is growing earnings at over 30% annually. That equates to a PEG ratio of just 1.2, which is well within my personal target of 1.5 or less for high-quality stocks.
Sometimes stocks become unpopular and the market sells them off. In this case, you can thank the market for the opportunity to buy Celsius at a price that should make long-term investors happy.
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Justin Pope does not own any stocks mentioned. The Motley Fool owns and recommends Celsius and Monster Beverage. The Motley Fool has a disclosure policy.
Celsius Holdings: Buy, Sell, or Hold? was originally published by The Motley Fool
