Celsius Stock Is Beaten Down Now, but It Could 10X

It's been a difficult year for Celsius Holdings (NASDAQ: CELH), with the stock trading down more than 70% from the highs it hit earlier this year. The energy drink maker ran into some headwinds recently, but its long-term prospects remain bright.

Let's take a closer look at what is behind the decline in Celsius' stock price and why the stock could be a strong rebound candidate in the years ahead.

Celsius' recent woes

There are two primary reasons why Celsius' stock has struggled this year. The first is that its growth normalized following the distribution deal it made with PepsiCo in 2022. The deal helped greatly expand Celsius' presence in the all-important convenience store channel, leading to astonishing yet unsustainable revenue growth throughout 2023. As the company started to lap these distribution gains, growth inevitably slowed, but that seemed to catch many investors, who had become used to its eye-popping sales growth, off guard. As growth began to decelerate from the 95% it reported in the fourth quarter of 2023 to 37% in the first quarter of 2024 and then lower thereafter, the stock tumbled.

Meanwhile, just as the company had become close to fully penetrated within the convenience store channel, convenience stores began to struggle with traffic. For example, large convenience store operator 7-Eleven announced it would close more than 400 stores after traffic slid 7.3% in August. The company noted consumers were being more prudent with spending due to inflation, high interest rates, and the job market.

The troubles faced by convenience stores led the energy drink category to grow just 1% so far this year, compared to 8% growth in 2023.

Image source: Getty Images.

A rebound candidate

While Celsius shares struggled, there are reasons to be hopeful of the stock being both a rebound candidate next year and a long-term winner. For one, according to takeaways from the National Association of Convenience Stores tradeshow, retailers and brands are generally expecting sales to begin to improve next year. Last quarter, the company had to deal with a mismatch in inventory, but that should also begin to work itself out.

The brand also remains very popular with younger consumers, who are likely to spend more as they grow older. According to a Piper Sandler survey of 13,500 teens, Celsius was by far the most popular energy drink, with 35% naming it their favorite. Given that the brand has an overall U.S. market share of around 12%, this gives it a lot of opportunity to take away share from market leaders Red Bull and Monster Beverage (NASDAQ: MNST), which trailed Celsius in the survey.

At the same time, Celsius continues to do very well in non-traditional channels, such as Amazon, as well as at big box retailers and club stores, like Costco Wholesale. It also continues to innovate with new flavors and products. Its newer Celsius Essentials lineup brings it into the larger 16-ounce energy drink category. It's marketing this new lineup of energy drinks with more of a focus on performance, looking to draw in more male consumers. The company said sales of the beverage line have largely been incremental without eating into sales of its other beverages.

Meanwhile, one of Celsius' biggest opportunities is international expansion. Last quarter, about 38% of Monster's energy drink sales came from markets outside the U.S. and Canada, while only 7% of Celsius' sales came from outside the U.S. That's a huge runway of untapped growth for the company.

Celsius has established itself in some Scandinavian markets like Sweden and Finland, but just began selling its beverages in the U.K. and Ireland in Q2, and only solely through the fitness channel and in select gyms. It is also entering markets such as Australia, France, and New Zealand. Monster, meanwhile, has been able to establish itself in European, Asian, and Latin American markets.

Celsius' stock is trading at a forward price-to-earnings (P/E) ratio of just under 30 times next year's estimates.

CELH PE Ratio (Forward 1y) data by YCharts

That valuation is not expensive if the company's drinks continue to take share with younger consumers and if it can take advantage of the large international opportunity in front of it.

Successful international expansion was a large part of Monster stock's huge gains and Celsius is still in the early stages of this opportunity. With a market cap of $6.4 billion compared to $55 billion for Monster (as of this writing), Celsius could be close to a 10x winner in the future if it can replicate Monster's success in the beverage category.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Monster Beverage. The Motley Fool has a disclosure policy.