Celsius: Expensive Valuation Justified By Phenomenal Growth

Investment Thesis

Celsius Holdings (NASDAQ:CELH) is a beverage company that sells Celsius branded energy drinks. Celsius positions itself as a healthier alternative to other energy drinks by using less sugar, sodium and artificial preservatives and more healthy ingredients like green tea extract, guarana seed extract, ginger root, and vitamins. The company cites scientific studies that show Celsius drinks improve metabolism and burn more fat during a workout, but most of these benefits are likely due to caffeine.

Celsius has been able to gain broad appeal beyond the traditional energy drink market and is taking market share from sports drinks and ready-to-drink coffees and teas. Besides taking share from Monster and Red Bull, Celsius is also taking market share from Gatorade, Starbucks and other caffeine drinks. Our base case valuation model suggests Celsius is worth $58, but we rate the stock as a BUY due to its strong history of execution and potential for upside surprises.

Celsius’ Broad Appeal and International Expansion Allows For Continued Growth

We think Celsius can continue to grow revenue by 1) taking more market share in the growing energy drinks market, 2) taking market share from sports drinks and ready-to-drink coffees and teas and 3) international expansion.

Celsius accounted for 6% of the US energy drinks market in 2023, which suggests Celsius can still grow revenue merely by taking market share away from Red Bull and Monster. Red Bull and Monster constituted 40% and 30% of the market respectively. Given its current high growth rates and strong branding, we expect Celsius to ultimately end up with over 20% market share in the US energy drink market.

Chart 1: Market share of the leading energy drink brands in the United States in 2023

Secondly, Celsius’ broad appeal means that its true addressable markets is not just energy drinks, but also sports drinks (e.g. Gatorade) and Ready-To-Drink coffee and tea (e.g. Nescafe). Grandview Research suggests that the US Energy Drink Market in 2021 was $20.7B with much of that from shots and mixers. The ready-to-drink coffee and tea market was valued at $17.6 billion and the sports drinks market at roughly $4 billion in 2021. In other words, adding in ready-to-drink coffee and sports drinks doubles Celsius’ TAM (total addressable market). Anecdotally, we’ve heard that many consumers are replacing their morning Starbucks/Nescafe coffee with Celsius. This is a use case that never seemed to apply in any substantial way for Monster and Red Bull.

Thirdly, Celsius has a long way to go with international expansion. They recently announced an expansion into Canada. Celsius’ revenue has been 96% derived from North America (nearly all of it from the United States) while Monster derives 40% of its revenue from outside the United States. We also note that their partnership with Pepsi has only occurred for a year and these partnerships typically take several years to see the full effect, especially internationally.

Monster Proves Beverage Company Moats can be Strong and Lucrative

Monster Beverage Corporation (MNST) is the closest comparable company to Celsius Holdings. Monster makes the eponymous named energy drink product and its stock has been celebrated as the highest performing stock of the last 20 years, generating a nearly 700x (or 70,000%) return on investment. A key reason why we invested in Celsius was because Monster had already proven that beverage companies can be extremely lucrative due to their high gross margins and recurring customers. Manufacturing is automated, cheap, and often outsourced. Drinks that are manufactured for $0.25 per can often end up selling for $1.5 in a vending machine or at the store. Other beverage companies like Pepsi and Coca-Cola have also shown similar long-term success with lower volatility.

The success of beverage companies is also not a uniquely American phenomenon. China’s richest man, Zhong Shanshan, owes most of his $60 billion net worth to Nongfu Spring Co Ltd, China’s largest beverage manufacturer. Chalerm Yoovidhya, heir to the Red Bull fortune and the second richest man in Thailand, has an estimated net worth of $33B.

Chart 2: Monster Beverage has returned nearly 700x to shareholders in the last 20 years

Beverage companies are protected by multiple moats including branding, distribution networks and economies of scale. Branding is the most important moat and Celsius excels here by emphasizing influencer and social media marketing campaigns. Celsius has attracted a younger and more female demographic, which is especially promising because customers can stay loyal for a lifetime and energy drinks have traditionally been associated with male customers. Brand loyalty means customers are willing to pay extra to get their favorite drink rather than try a similar drink on the shelf next to it. Drinks are small-ticket items and people are naturally wary about anything they put in their mouths, which further enforces brand loyalty. There are hundreds or thousands of different cola brands, but there is only one Coca-Cola.

Having distribution channels is also critical. Distribution channels are built over a long time and are very difficult for newcomers to replicate due to the time and size. Pepsi and Coca-Cola have among the strongest distribution channels globally, and Celsius’ exclusive partnership with Pepsi has been a critical driver of their growth. Economies of scale also percolate generally, with larger scale allowing for lower supplier costs and SG&A expenses per drink sold.

Comparable Multiples with Monster and Celsius on P/E and Growth Metrics

On a valuation basis, Celsius trades at a TTM P/E and NTM P/E ratio of 120x and 56x (our estimates) respectively. Monster trades at a TTM P/E of 38.7x and a forward PE of 37x. Celsius also trades at a TTM P/S ratio of 12.1 compared to Monster’s 8.7. Looking at these numbers alone would suggest Celsius is overvalued. However, Celsius is growing revenues 7x faster than Monster, having grown 104% in the last quarter compared to Monster’s 14% growth. Celsius’ TTM EV/S/G ratio of 11.6 is way lower than Monster’s 62.5.

Chart 3: Valuation Ratios for CELH and MNST

Monster deserves a premium valuation because its management has proven itself over 20 years by showing stratospheric revenue growth and commensurate stock returns. Investors may be tempted to short Monster due to its low PEG ratio, but we think that would be a mistake as Monster deserves the high premium afforded to high quality, proven companies. However, Celsius absolutely has the potential to “prove itself” as well, having returned 35x for shareholders since 2018.

Chart 4: Celsius vs Monster vs S&P 500 Since January 1, 2018

Potential Selling Pressure from the DeSantis Estate

Carl DeSantis, a 20% holder who played a key role in financing and building Celsius’ brand, passed away on August 10, 2023. Estates typically sell shares to generate liquidity for heirs. If the DeSantis estate chooses to liquidate shares, that would create near-term selling pressure on the stock. So far, we have not seen any SEC disclosures regarding the sale of shares. Damon DeSantis, son of Carl DeSantis, remains on the board of directors.

We are speculating here, but his estate may already be selling down shares via equity swaps or other derivatives. Equity swaps allow hedge funds and other institutional investors to gain an economic exposure to a particular stock without actually owning the underlying stock. Common reasons why hedge funds do this include 1) the desire to remain secretive as they build up positions, 2) legal reasons prohibiting the buying or selling of the underlying shares and 3) taxation reasons.

From August to December 2023, Celsius largely sat out a growth stock rally that saw the Vanguard Mid-Cap Growth Index Fund ETF (VOT) increase 20%. One reason for the muted movement may be that the DeSantis estate is indeed indirectly selling down shares. If the DeSantis estate has not been selling shares and instead plans to sell shares soon, however, this would create an overhang on the stock that investors should be aware of.

Chart 5: Celsius Stock Price Return – August 2023 to January 2024

Financials and Valuation

Using a 5-year DCF approach we get a target price of $58 using the below assumptions:

• Annual revenue growth rate of 50% for next twelve months that then subsequently decreases, reaching 15% in Year 5, for a 5-year revenue CAGR of 30%. This is a significant deceleration from Celsius’ previous triple year growth.
• 52% gross margins in Year 5 on par with Monster.
• 21% net margins also on par with Monster.
• Diluted share count of 237 million shares with 2% dilution a year, leading to 262 million shares in Year 5.
• WACC of 10.0% and a terminal P/E multiple of 27x. This terminal PE assumption is high compared to the S&P 500’s current multiple of 21x, but beverage companies deserve higher valuations due to their recurring revenues and macroeconomic stability. Peer MNST trades at a forward PE of 37x with TTM growth of 14%.

Table 1: Celsius Valuation Model

Seeking Alpha Quant Rankings and Factor Grades

Table 2: Celsius Quant Ratings and Factor Grades from Seeking Alpha

Seeking Alpha’s factor grades show Celsius scores top ratings on great growth, profitability, momentum and revisions. Not surprisingly, Celsius fares poorly on valuation with an F grade. Celsius is a great fundamental story that comes with a very high price tag and the stock will fall if execution falters.

Negatives and Risks

Valuation remains the main risk for Celsius. At a trailing 120x TTM P/E and a 56x NTM P/E (our estimates), the stock is very expensive and requires continued high revenue growth and net margin expansion to justify the stock price. While Celsius has delivered with 100%+ annual revenue growth in the last 3 years and an inflection into profitability, growth must necessarily slow down and in some cases could be dramatic. A slowdown that is worse than we expect would cause the stock to re-rate significantly downward. Such a slowdown could be driven by a new energy brand taking market share from Celsius (e.g. Ghost, Alani Nu), a more difficult-than-expected international expansion or just general poor execution.

Celsius may also face legal risks. Celsius lost an $80 million lawsuit with Flo Rida, one of its brand ambassadors last year and is currently appealing. Celsius also settled a class action lawsuit regarding whether citric acid should be considered a preservative or merely a flavoring ingredient. In the beverage space there’s a temptation to overstate health benefits, which can often backfire. Monster successfully bankrupted Bang by suing them for misleading claims regarding health benefits regarding “Super Creatine” which turned out to be false.

Conclusions

From a fundamental perspective, Celsius is executing strongly and it’s very rare to see profitable large cap stocks grow 100%+. Celsius consists of 7.5% of our portfolio and has grown into our largest position. We are not adding to the stock here because we prefer a higher margin of safety and the stock is trading slightly above target price. Our average entry price has been $25 (split adjusted) but history has taught us that it’s best to hold on to winners that are executing well fundamentally unless the valuation ends up being crazy high. While Celsius isn’t cheap, an EV/S ratio of 12x and NTM P/E of 56x (our estimates) for 50% forward revenue growth is reasonable, especially in today’s frothy market.

We are still bullish on the long-term narrative and the stock has potential to become the next Monster. While sheer size and high valuation make it essentially impossible for Celsius to deliver 10x returns going forward in the next 5 years (let alone the 700x that Monster has delivered to shareholders in the last 20 years), there is ample room for the stock to double or even triple in the next 5 years. We retain a BUY rating on the stock and continue to hold the stock as our largest position.