Within the last few months, the stock price of Celsius Holding (NASDAQ:CELH) has fallen by around 70%. We take a look at the reasons for this and whether Celsius is a buy at the current price.
Growth is the key factor
One of the most important parameters for a growth company is, of course, growth. Celsius’ rapid upturn in recent years and the downturn of the last three months are directly linked to the company’s sales performance. This key figure therefore requires special consideration.
According to Nielsen data from 2024, the market for energy drinks is experiencing strong and sustained growth. Sales figures now exceed 22 billion US dollars, with a compound annual growth rate of 9.9% until 2030. This trend is driven in particular by consumers’ increasing desire for healthier options, such as energy drinks with low sugar content and natural ingredients. Brands such as Celsius Holding, which focus on health and wellness, are therefore ideally positioned to benefit from this trend.
At the same time, energy drink manufacturers such as Celsius Holdings are facing increasingly intense competition. For example, Nielsen reports over 250 new product launches last year aimed at health-conscious consumers.
Initially looked down upon for its size and health-conscious focus, Celsius has since attracted the attention of larger competitors. For example, Monster (MNST) recently adopted a healthy lifestyle trend with its Reign brand in order to position itself more strongly in the market. This new competitor is intensifying pressure in an already aggressive and highly dynamic market.
In order to have a competitive advantage over its rivals, Celsius Holding entered into a partnership with PepsiCo (PEP). In 2022, PepsiCo invested USD 550 million in Celsius and received a convertible bond, which will be converted into an 8.5% stake in the company after six years if certain market share targets are met.
This partnership brings a number of benefits for Celsius. Firstly, by using Pepsi’s distribution network, sales have increased significantly within a very short space of time, as both logistics and shelf space are particularly important in the convenience and petrol station markets, which play a special role in the energy drinks market. Margins have also increased significantly thanks to the cooperation and the associated economies of scale. Furthermore, Celsius will be able to rely on Pepsi’s distribution channels for its international expansion, meaning that no significant investments should be necessary.
At the same time, the cooperation also brings some challenges. First of all, it is important to understand that Pepsi initially buys the drinks from Celsius and places them in its warehouses. Celsius therefore receives its money in advance, without even a single can having been sold in the supermarket. Pepsi then sells the cans through its channels and receives the proceeds. At the beginning of the cooperation, Pepsi bought a very large number of cans, which seemed to suggest enormous growth for Celsius. However, this triple-digit growth could not be achieved on the market. For this reason, Pepsi is currently endeavoring to reduce the high stock levels before ordering future batches from Celsius. It is unclear how high sales actually were on the market and how long it will take to reduce stocks. In addition, at the โBarclays 17th Annual Global Consumer Staples Conferenceโ, the company’s management held out the prospect of a further short-term slowdown in growth. This situation means that investors are highly uncertain about the actual growth in Celsius sales on the market.
Another disadvantage is Celsius’ high dependence on Pepsi. For instance, 60% of Celsius’ sales are generated through Pepsi’s distribution channels, meaning that it is dependent on its major partner for a large part of its growth and to maintain its margins.
It is also not clear what would happen if the market share targets set as part of the cooperation were not achieved in four years and the cooperation between the companies were to fall apart without Pepsi’s 8.5% stake in Celsius.
All in all, it can be said that the cooperation with Pepsi is very advantageous for Celsius, but at the same time, entails a high degree of dependency and uncertainty with regard to future developments.
Based on current knowledge, it can be assumed that Celsius’ sales growth will be around 20% this year and that no significantly higher growth rates should be expected in the coming years, despite international expansion. The current fall in the share price can be attributed to the previously very high expectations and the current slowdown in growth.
Even if these aspects are not the focus of my analysis, the fact that Celsius is a practically debt-free company with a solid and growing free cash flow should not be ignored. Furthermore, margins have increased significantly in recent years. For example, the FCF margin of 11.7% is still below Monster’s 15.4%, but increases can be expected in the future so that the company can reach the level of other competitors.
Is Celsius currently a buy?
Before we look at the valuation, let’s look at one particular scenario: What if the stock is already so cheap that it could be acquired by a competitor? For example, Pepsi acquired Rockstar Energy in 2020 for USD 3.85 bn at a P/S ratio of 6. In 2021, Coca-Cola acquired the sports drink company Bodyarmor for USD 5.6 billion, which corresponds to a P/S of around 13. Celsius currently has a P/S ratio of 5, meaning that it is in a price range where a takeover by PepsiCo in particular cannot be ruled out. This thesis is supported by the fact that when the partnership between Pepsi and Celsius was entered into in 2022, a convertible bond was issued that gives Pepsi the opportunity to acquire 8.5% of Celsius in 2028. At the price paid for the stake at the time, this would correspond to a value of USD 75 per share, which equates to a potential upside of around 23% p.a. on the current share price. Particular attention should be paid to this circumstance, as Pepsi will have carried out a comprehensive due diligence of Celsius in the run-up to the investment, which goes far beyond the capabilities of a stock analyst. In my view, the due diligence by Pepsi and a possible takeover scenario represent a hedge in the current uncertain market situation.
Nevertheless, I have done my own valuation based on the DCF model. The assumptions I have made are; growth of 20% over the next 4 years, then a reduction to 15% and finally a terminal growth rate of 3%. Furthermore, I have assumed that the FCF margin can be increased from the current 12% to 15% in the coming years to the level of Monster. I have made the assumptions regarding the equity risk premium (5.96%), the risk-free rate and the WACC (8.5%) on the basis of data from Damodaran. Overall, I see the entry price at USD 27 considering the assumptions described. In my view, however, these are relatively conservative estimates, as growth in particular could also achieve higher values in the medium term.
Despite the current high level of uncertainty, the current situation at Celsius could therefore represent an opportunity for risk-taking investors with higher return expectations. If Celsius manages to maintain or even increase its growth rate, this should soon pay off for investors.
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