Multiple, Positive Catalysts Should Boost Celsius Stock

By Larry Ramer

Demand for Celsius’s fitness and energy beverages is strong among teens, which bodes well for the company's longer-term outlook. And in the medium term, more favorable trends at convenience stores can help Celsius stock.

These two developments appear to have gotten the Street excited about CELH stock. As a result, I believe that the shares could be starting to embark on a short-covering rally.

Moreover, I think that the brand's tremendous popularity among U.S. retailers, its entrance into multiple overseas markets, its edge in the healthiness area, and its relatively low valuation make it a good fit for patient investors.

The growth of the company's revenue in the U.S. has decelerated a great deal, but the latter development appears to be at least partly due to technical factors, and third-party assessments show that  its sales are still increasing meaningfully.

In light of these points, I recommend that some growth investors buy the shares.  

Celsius Performs Well in Piper's Teen Survey 

In a survey of teens by investment bank Piper Sandler, Celsius was ranked third among energy drinks, including coffee vendors. Celsius trailed only Monster Beverage and Red Bull. The results of the survey appear to have triggered a large-scale rally by Celsius, as the shares climbed 6% on Oct. 9

I believe that the survey also bodes well for the longer-term outlook of Celsius and CELH stock. That's because the data suggests that the company is popular among Gen Z  — that is, Americans born between 1997 and 2012. As of 2023, the cohort represented roughly 20% of the population, according to the Census Bureau,  and as of 2023, it reportedly had $360 billion in buying power. 

As the generation ages and more of them enter the workforce, that buying power likely will grow exponentially. What's more, the opinions of Gen Z can heavily influence the opinions and buying habits of older generations, including their parents, older siblings, and older cousins, aunts and uncles.  

On the convenience store front, investment bank Stifel’s conversations with "brand owners and retailers" at the National Association of Convenience Stores trade show, revealed that the sector's sales are expected to rebound next year. The bank noted that the sector accounts for 62% of energy drink sectors. Additionally, Stifel now predicts that Celsius will increase its prices by about 5%.   

CELH stock jumped 14.4% on Oct. 10 following the release of that report. Since 10% of the shares have been borrowed by short sellers, I believe that CELH stock may be starting a short-covering rally.

Major Retailers Embrace Celsius as Brand Expands Overseas

On Celsius's earnings call for the fourth quarter of 2023, CEO  John Fieldly reported that the company had placed over 10,000 "Celsius branded coolers" in stores in the U.S., a three-fold jump compared with 2022. The company's beverages are now available in many if not most major retail outlets across the U.S., including 7-Eleven, Target (NYSE:TGT), Walmart (NYSE:WMT), Amazon (NASDAQ:AMZN), Dunkin Donuts and Kroger (NYSE:KR). Even in my own shopping excursions at Tom Thumb, I've seen that the company's products are prominently displayed.

And in a Goldman Sachs survey conducted late last year, some 87% of convenience stores were expecting to allocate more space to Celsius by spring 2024.  More recently, in Q2 the amount of shelf space devoted by convenience stores to Celsius rose 39% year-over-year. 

That so many retail outlets are embracing Celsius suggests this is an up-and-coming brand resonating big with consumers. And that belief, in turn, bodes well for Celsius' longer-term outlook, despite the deceleration of its revenue growth which I'll discuss below.

Meanwhile, Celsius' expansion into overseas markets bodes well for the firm's longer-term outlook. In the fourth quarter, it's slated to enter Australia, France, and New Zealand. In the second quarter, it started selling its beverages in the UK and Ireland. Encouragingly, the company reported on its Q2 earnings call that its performance in the UK and Ireland, along with its start in Canada where it launched in February, were ahead of its expectations.

If Celsius can ultimately become anywhere close to as popular in overseas markets as it is in the U.S., its top- and bottom-lines will obviously get a huge boost. And indicating that the company is off to a good start in this area, its international sales climbed 30% year-over-year in Q2 to $19.6 million.

Since the company's total Q2 revenue came in at $402 million, we can conclude that overseas sales already generated nearly 5% of its total revenue at the very beginning of the company's entrance to the UK and Ireland and before it had launched in Australia, France, and New Zealand. That's certainly an encouraging start and bodes well for the outlook of its overseas   

Celsius' Healthy Edge

Celsius' two top competitors in the energy drink space — Monster Beverage (NASDAQ:MNST) and Red Bull — are sugar-heavy, both with 27 grams of sugar, while Celsius has only 2 grams of the sweetener. Bang, which was acquired by Monster last year, has no sugar. But it has 300 milligrams of caffeine, versus Celsius' 200, and many have expressed concerns about Bang having an excessive amount of the stimulant.

Also, Celsius appears to have significantly more healthy vitamins than Bang. For example, Bang's Blue Razz drink has 30% of the daily allowance of Vitamin C, according to its display on Amazon, while the Tropical Vibe can of Celsius that I have in my apartment has 70% of the RDA for Vitamin C. And while Celsius' beverage has 130% of the RDA for Riboflavin, the latter vitamin is not among those listed as being in Bang's offering. 

 Celsius' Growth Deceleration

In Q2, Celsius' revenue increased by 23% versus the same period a year earlier to $402 million. That marked a large deceleration from the 36.9% and 94.9% YOY gains seen in Q4 and Q1, respectively. 

But part of the reason for the deceleration is related to the decision by Pepsi (NYSE:PEP), Celsius' distributor, to use its inventories of Celsius to meet a portion of retailers' demand rather than do so by buying additional cans from Celsius.  That situation reduced Celsius' revenue by $20 million to $25 million in Q2. Also weighing on Celsius' revenue has been weakness in the traffic of convenience stores. Speaking on Celsius Q2 earnings call,  Celsius EVP Toby David reported that the volume of foot traffic in convenience stores had fallen significantly. 

But the purchases of Celsius' beverages by consumers continue to grow. During the four-week period that ended on Aug. 10, the sales volumes of the company's beverages climbed 16.6% YOY, although the increase was partially offset by a 7.8% drop in price/mix. And in the four-week period that ended on July 27, the sales of the firm's products increased 12.3% YOY. 

Over the longer term, the Pepsi inventory issue is expected to dissipate, while the convenience store sector is expected to strengthen. In my view, the combination of those two factors, along with the maturation of Celsius' overseas business, should enable its sales growth to significantly reaccelerate.

Valuation and Risks

Celsius' forward price-to-earnings ratio of 37.6 times is far above the sector median of 20.2 times. Yet Celsius' P/E ratio is far below a number of similar, fast-growing, high-potential names within the food and beverage sector. For example, coffee shop chain Dutch Bros (NYSE:BROS) has a forward P/E of 95.5 times, while Mediterranean restaurant chain CAVA Group (NYSE:CAVA) has a forward multiple of 310x and chicken-wing restaurant chain Wingstop (NASDAQ:WING) trades at 107x forward earnings. Since I believe that CELH, like these firms, has a great deal of growth potential over the long term, I believe that its shares should trade for at least 70-80x its forward earnings estimate.

On the risk front, Celsius faces tough competition. Specifically, it has to face off against  Monster, including its Bang brand, and Red Bull. Either or both companies could take significant market share from Celsius with successful marketing campaigns and/or by introducing new, healthier brands. Additionally, Celsius' overseas business may not take off in-line with my expectations due to cultural differences, economic problems, and/or tough competition in those markets. Finally, the expected rebound of the convenience stores and the anticipated dissipation of the Pepsi inventory issue may not occur. 

The Bottom Line on Celsius

Over the long term, Celsius and CELH stock should be boosted by the firm's edge as far as  healthiness is concerned and by its overseas expansion. I believe that the current valuation of CELH stock does not come close to reflecting these factors. Therefore, I urge long-term growth investors to buy the shares.      

With the shares potentially undergoing a short-covering rally, they may also be attractive for short-term investors and traders as well.

Disclaimer: The author did not hold a position in any of the securities mentioned above. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.