Celsius Holdings: Buy, Sell, or Hold?

It can be difficult to think dispassionately about your stock investments. After all, it’s your hard-earned money at stake.

But investors need to take a step back and analyze a company’s fundamental prospects when they are considering buying or selling its shares. This approach can help you avoid getting swayed by considerations such as the news reports or short-term stock price swings.

Investors could certainly benefit by taking that approach with Celsius Holdings (CELH -1.49%). Earlier this year, its stock price approached an all-time high of nearly $100. Since then, the shares have fallen by about 64%.

Does this represent a warning signal or a buying opportunity?

Image source: Getty Images.

Fast but slowing top-line growth

Celsius, founded in 2004, makes and sells energy drinks. The company markets its highly caffeinated products as fitness drinks, featuring ingredients such as green tea and ginger, and minimizing artificial ingredients.

Customers have been receptive, and sales have grown quickly. The company inked a domestic distribution agreement with PepsiCo in 2022 that they expanded to Canada late last year.

Celsius brought in $1.6 million in revenue in 2007; by last year, its top line had grown to $1.3 billion with earnings of $0.79 per diluted share. And from 2022 to 2023, with the help of the PepsiCo deal, the top line doubled.

Opportunities and challenges

While its growth has slowed in 2024, second-quarter revenue still increased a healthy 23% year over year to $402 million, and earnings increased 65% to $0.28 per diluted share. Celsius’ share of the energy drink market had expanded by 1.4 percentage points to 11% as of mid-July.

Management has also been working on expanding the brand’s footprint internationally, and early results have been promising. International sales grew 30% in the latest quarter as it began sales in Canada, the United Kingdom, and Ireland. Management expects to launch the brand in Australia, New Zealand, and France this year. In Q2, Celsius’ $19.6 million in sales outside the U.S. accounted for just 5% of its top line.

However, the road ahead may not prove smooth.

The beverage market, particularly for energy drinks, can be fickle. Right now, that segment is doing well as some people turn away from carbonated beverages toward energy drinks that offer certain perceived advantages, such as health benefits. But consumer trends can change quickly; a given energy drink may not prove the panacea that customers hoped it they would, or another product may catch on. For instance, rival Monster Beverage was once a high-flying company. It had revenue growth of just 2.5% in the second quarter.

The PepsiCo agreement has provided financial benefits to Celsius. However, Pepsi’s wholesale purchases accounted for over 59% of Celsius’ 2023 revenue. That leaves Celsius highly susceptible to any changes in that channel. And management indicated after the second quarter that Pepsi was reducing orders since it had built up too much inventory of Celsius products.

Other major customers include Costco Wholesale (NASDAQ: COST) and Amazon (NASDAQ: AMZN), which account for 12% and 7.6% of its revenue, respectively.

The decision

Celsius’ stock still trades at a high price-to-earnings (P/E) ratio of 33 even after its 38% share price drop since the start of the year. That is down from a ratio of more than 100 at the start of the year, but still higher than the S&P 500‘s ratio of 29.

As such, the shares remained priced for continued fast growth. But with Pepsi cutting orders, sales growth could slow from its previous breakneck pace, further negatively impacting the share price.

I’d avoid the shares at this point. Long-term shareholders may want to continue holding the shares given that growth opportunities for Celsius remain, particularly internationally. But I’d keep a close eye on shifting trends.