A lower valuation has changed the investment thesis of this company.
The year 2024 is one Celsius (CELH 4.88%) shareholders would like to forget. The stock has lost 65% of its value since its peak in May, and investors have turned on it amid an apparent inventory crunch.
Nonetheless, the inventory issues are likely to be temporary. With a more normalized valuation, it may be time for investors to get back into the beverage stock. Here’s why.
The state of Celsius stock
Celsius has stood out in the beverage market by taking a different approach to energy drinks. Unlike competitors such as Monster Beverage or Red Bull, Celsius has placed a stronger emphasis on natural ingredients. It uses guarana extract as its stimulant, a form of caffeine derived from plants.
As consumers gravitate toward more natural foods, that approach has helped Celsius win market share. According to the company, Celsius is now the second-largest brand among sugar-free energy drinks.
Moreover, over the last few years, some of the more successful consumer-related investments are energy-drink stocks. This is true of Celsius, as its stock rose by almost 2,600% over the last five years.
CELH data by YCharts.
However, the one-time sizzling temperature of Celsius’s stock price has cooled considerably. The company cited macroeconomic challenges and rising competition as challenges. To that end, one major distributor, more than likely PepsiCo, bought considerably less Celsius due to overbuying in previous months.
Celsius has downplayed this issue, reiterating that its PepsiCo partnership remains strong. The company also announced new programs for 2025, including plans to improve innovation, additional channel and product opportunities, new partnerships, and further international expansions. While it is too early to know how successful these efforts will be, the efforts to continuously improve should reassure investors.
Celsius’ financials have cooled, but they may heat up again
Fortunately, for Celsius investors with long positions, growth remains robust. The company reported $758 million in revenue for the first half of 2024, a 29% increase from the same period in 2023.
Admittedly, that growth rate slowed to 23% yearly in the second quarter. Still, the company maintained that its sales grew at 10 times the growth rate for the overall category.
Additionally, the increase in most expense metrics lagged revenue growth for that period. Thus, the $132 million in net income attributable to common shareholders in the year’s first half surged higher by 82% yearly.
Also, for all of the likely disappointment in the stock’s recent performance, investors looking for an excellent time to add Celsius shares may have finally found their opportunity. The price-to-earnings (P/E) ratio has fallen to 33, near the lowest level since stock prices cratered in 2020.
Celsius does not offer forward guidance, and with analysts forecasting only 9% revenue growth for the year, its current P/E ratio may seem expensive given that rate. Still, the same analysts forecast revenue growth of 17% in 2025, a level that makes its earnings multiple appear more appealing.
Investing in Celsius stock
The macroeconomic challenges and distribution issues have likely created a buying opportunity in Celsius stock. Admittedly, less buying by distributors is a disturbing sign in the near term, and the macroeconomic headwinds rightly worry investors about future growth. Also, a drop of nearly two-thirds should concern even the most risk-tolerant investors.
However, investors also have reason to believe the growth slowdown may be temporary. Considering the overall growth in the brand will likely continue, the distributor cutting back on buying is more than likely an inventory correction rather than a permanent turn against the brand.
Additionally, while the valuation is not cheap, the 33 P/E ratio may seem more reasonable when considering the prospects for a return to double-digit revenue growth. If one can tolerate the risk, this is likely an excellent time to add shares of Celsius stock.
Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius and Monster Beverage. The Motley Fool has a disclosure policy.