Is It Too Late to Buy Celsius Stock?

In the past five years, the Nasdaq Composite Index has produced a total return of 123%, translating to an annualized gain of 17.4%. That’s an outstanding increase.

But one booming business, Celsius (CELH 0.49%), has trounced that broad index. The beverage stock is up 6,290% in the past five years, which would have turned a $10,000 initial investment into a jaw-dropping $640,000 today.

After such a monumental rise, you might be wondering if it’s too late to buy Celsius shares. Read on to get more clarity about what investment action you should take.

Unbelievable growth trajectory

There’s no question that Celsius shares have done so well precisely because of the company’s fantastic growth. Revenue soared 37% during the first three months of 2024. Even though the first-quarter sales gain was much slower than full-year 2023’s 102% rise, investors seem to be very pleased with the results. The stock is up 22% in the five trading days since that financial update was provided on May 7.

I think there are some key trends working in the company’s favor. One is how the brand markets its products. Celsius aims to be a health-conscious energy drink, with natural ingredients and no sugar, that can not only boost energy, but burn fat as well. This plays to the rising interest in overall health and wellness, particularly after the pandemic.

It doesn’t hurt that the energy drink category is experiencing strong demand. Thanks to 9% annualized sales growth since 2018, the energy drink industry is now a $44 billion global market (excluding China-specific brands).

Soft drinks, on the other hand, are seeing declines in per-capita consumption in the U.S. That’s a notable contrast to the wave that Celsius is riding.

The business is also benefiting from simply broadening its distribution capabilities. This almost seems like an obvious strategy, getting a company’s products on more store shelves and in more retail settings. But it has worked wonders for Celsius.

Credit goes to the partnership with PepsiCo, which made the beverage and snacks giant a distribution partner of the energy drink business. Pepsi has an equity stake in Celsius as well, so it has skin in the game to want to achieve a successful outcome for both parties in the long run. Management highlighted on the Q1 2024 earnings call that Pepsi is helping penetrate “restaurants, recreation, lodging, and gaming locations.”

On the e-commerce front, Celsius is having remarkable success selling on Amazon. “Sales on Amazon increased 30% year over year,” CEO John Fieldly said on the call.

High-energy expectations

When investors see a business growing as quickly as Celsius has been, they wouldn’t be wrong to assume that achieving positive earnings is an afterthought. But it’s worth mentioning that Celsius is very profitable.

Thanks to a combination of reduced freight and raw material costs, the company’s gross margin expanded from 43.8% in Q1 2023 to 51.2% in the latest quarter. And this led to an 89% surge in net income. Executives believe Celsius can generate strong free-cash-flow growth this year as it aims to better leverage its expenses.

This favorable profitability trend, coupled with tremendous growth potential, is exciting from an investment perspective. However, I think it’s best to pass on the stock right now.

At a price-to-earnings ratio of 103, shares are extremely expensive. In my opinion, this dizzying valuation prices in a near flawless execution by the management team in the years ahead. There is zero room for error.

That makes me believe that it is, in fact, too late to buy Celsius stock. If investors still like this business, though, then consider waiting for a huge pullback before making a move.