Is CELH Stock Still A Buy After Its 30% Rally?

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Question: Why would you pay 7 times revenues for Coca-Cola stock (NYSE: KO) when you could acquire Celsius Holdings stock for 6 times sales? You wouldn’t, particularly when considering three straightforward facts:

1. Growth: Celsius’s revenue is increasing at a much more rapid pace, exceeding 70% annually over the past three years, whereas Coca-Cola’s revenue growth is roughly 7%.
2. Profitability: Celsius’s operating cash flow margins surpass 19%, compared to 14% for Coca-Cola, indicating a larger portion of their revenue growth is converted into actual cash flow for the company.
3. Financial Stability: Celsius displays a balance sheet with much lower debt (0.2% Debt-to-Equity) and significantly higher liquidity (50.4% Cash-to-Assets) compared to Coca-Cola (14.3% Debt-to-Equity and 14.5% Cash-to-Assets).

Is Celsius Stock A Safe Investment?

Celsius is not precisely a “safe haven” asset, as shown by its historical performance during market downturns. To illustrate this point, consider CELH’s behavior in past economic shocks. During the 2022 inflation crisis, the stock saw a significant drop of over 62%. Similarly, amid the pandemic uncertainties of 2020, CELH stock decreased by over 51%, far exceeding the S&P 500’s peak-to-trough declines of 25% and 34%, respectively. Therefore, based on this historical evidence, CELH stock does not seem to represent a dependable safe investment, particularly during times of market stress. Our dashboard How Low Can Stocks Go During A Market Crash outlines how key stocks performed during and following the last six market crashes.

It’s crucial to acknowledge that Celsius stock has shown considerable upward momentum, experiencing a robust rally of over 30% year-to-date. This performance substantially outstrips the broader S&P 500 index, which has fallen by 4% during the same timeframe. However, for investors searching for a potentially more stable yet high-performing option, consider the Trefis High Quality portfolio. This strategy has outperformed the market with returns exceeding 91% since its inception, as evidenced by its HQ performance metrics. Separately, see – Google’s $1 Trillion Problem: Stock To Crash 40%?

Celsius Is Positioned For Significant Growth In Functional Energy Drinks

For investors optimistic about the long-term growth and broad acceptance of functional energy drinks, regardless of commodity price fluctuations, Celsius Holdings could represent an appealing long-term investment at its current valuation. This is primarily due to Celsius being a major disruptor in the evolving energy drink market. Rather than concentrating on the success of established legacy brands like Monster, Red Bull, or PepsiCo, investing in Celsius is fundamentally a bet on the growing consumer demand for healthier, functional energy choices across all major distribution channels.

Given that the functional beverage market is still growing, retailers and distributors are currently allocating significant shelf space to this essential category. The magnitude of investment in this sector is underscored by initiatives like PepsiCo’s multi-million dollar distribution partnership, emphasizing the considerable ongoing commitment to the functional energy drink market.

In August 2022, Celsius Holdings and PepsiCo entered into a long-term strategic distribution agreement. As part of this collaboration, PepsiCo invested $550 million in Celsius, acquiring an 8.5% ownership stake and becoming its preferred global distribution associate. This collaboration has granted Celsius access to PepsiCo’s extensive distribution network, significantly broadening its market presence.

This partnership has proved critical to Celsius’ growth strategy, enhancing brand visibility in retail venues across the United States, with prospects for international expansion. As a result, the distribution deal with PepsiCo is a vital component of Celsius’ business model and its continuous growth path.

Potential Risks to Consider

Despite its attractive prospects, investing in Celsius Holdings carries inherent risks that investors must weigh. One potential disadvantage is the likelihood of earnings not meeting expectations or a major slowdown in growth from the current high rates to a more moderate level in the near future, especially if consumer expenditure on premium beverages tightens.

Another aspect to take into account is the chance of Celsius’ competitors increasingly aiming to develop their own health-focused energy drink alternatives, which could lead to market fragmentation and pressure on Celsius’ market share. Additionally, the stock is perpetually vulnerable to adverse effects from unexpected increases in commodity costs or regulatory scrutiny concerning health claims associated with functional beverages.

Considering these potential risks, investors should be prepared for the possibility of a substantial downturn in share price, possibly as much as 40%. It’s essential to recognize that selling during such a significant decline would likely be counterproductive to long-term investment objectives. As an aside, check out – XRP Price To $5?

Long-Term Perspective

From a long-term view, investors with a 3-to-5-year outlook who can handle volatility may find CELH an intriguing entry point into the growing functional energy drinks sector, even at its present price levels. Trading around $36, CELH stock currently possesses a price-to-trailing-revenue multiple of 6x, which is below its three-year average of 9x. Additionally, the average analyst price target of $43 indicates a potential upside of approximately 20% for CELH stock.

For investors looking to mitigate the inherent volatility linked with individual stocks like CELH, there are alternative investment strategies to consider. The Trefis RV strategy, which has a track record of outperforming its all-cap stock benchmark, offers a diversified approach to potentially achieve solid returns. Likewise, the High-Quality portfolio has demonstrated superior performance relative to the S&P 500 with returns exceeding 91% since its inception, presenting potential upside with reduced stock-specific risk.