Celsius: Buy The Pullback (NASDAQ:CELH)

Over the past couple of years, one of the best performing names in the market has been Celsius Holdings (NASDAQ:CELH). The energy drink company has showed tremendous revenue growth quarter after quarter, with the latest leg up being helped significantly by a distribution deal with beverage giant PepsiCo (PEP). Recently, the stock has pulled back quite a bit from its all-time high, which likely provides an attractive entry point for those investors that had previously been on the sidelines.

For those unfamiliar with Celsius, it is a maker of both carbonated and uncarbonated energy drinks. It sells its products through a variety of locations, including supermarkets, conveniences stores, health clubs, etc., as well as through online retailers like Amazon (AMZN). As the table below shows, Celsius has increased its US market share nicely in recent quarters, yet it still represents less than 10% of the US energy drink market. There is plenty of opportunity here to further expand its share in this fast growing space, which should help the company head towards half a billion dollars in quarterly revenue in the coming couple of periods.

Last year, Celsius reported over $653 million in total revenue, up from just $131 million two years earlier. The company reported a yearly operating loss of nearly $158 million, as it dramatically spent on sales and marketing to grow the brand. This year, it hasn’t had to spend as much on the operating side as percentage of revenues, and the Pepsi distribution deal has helped improve gross margins considerably. The company’s growth has also allowed it to scale better, while management has worked to make the business more efficient. This year, total revenues are expected to nearly double to $1.25 billion, with this being the first year where the company is expected to deliver meaningful profitability.

When the company reported Q2 results, investors cheered revenue growth of about 112%. Celsius beat street estimates by nearly $49 million on the top line, the 19th beat in the past 20 quarters, and the largest dollar beat in company history. The company improved gross margins by more than 10 percentage points over the prior year period, leading diluted earnings per share to soar by 333% over Q2 2022 levels.

Between all those revenue beats and expanded distribution capabilities after the Pepsi partnership, analysts have been tripping over each other to raise their revenue estimates. As the chart below shows, this year’s average estimate has skyrocketed over the past three years. Recent data points have reportedly showed the company is on pace to smash Q3 revenue estimates, which would push the year’s sales estimates even higher.

Perhaps the biggest area of opportunity for the company moving forward is on the international side. In Q2, revenues for this segment were only about $15 million, or just about 5% of Celsius’ total. As detailed on the Q2 conference call, management expects a further rollout in international markets in early 2024, with further expansion planned for 2025 and 2026. These new sales points next year are a key reason why I think the company may be able to hit $2 billion in revenues during 2024, especially if US market share can increase into the low double digits.

This is not one of those high revenue growth companies that is also losing money either. I mentioned above the earnings per share increase, as net income in the first half of this year was more than $92 million, as compared to just $16 million in the first six months of 2022. There isn’t a lot of stock-based compensation here either, so earnings per share growth won’t be heavily impacted by dilution in the coming quarters.

Celsius also checks off one of the major boxes for investors, and that’s a very healthy balance sheet. The company finished Q2 with over $680 million in cash, which is actually more than all of the liabilities it has. There is more than enough financial flexibility here to invest in future growth efforts, and Celsius is also cash flow positive at the moment. That strong cash balance could be used to generate some nice interest income at the moment with interest rates on the rise. Alternatively, the company could look at acquisitions to further bolster revenue growth, or potential to start buying back shares at some point.

The one worry for investors over the years has been valuation. Celsius does trade at almost 100 times this year’s expected earnings, but that figure improves greatly moving forward when you factor in expected bottom line growth. On a price to sales basis, Celsius goes for less than 8 times 2024’s current average revenue estimate, which is barely above Monster Beverage’s (MNST) 7.25 times. I think that if everything goes right, Celsius could report about $2 billion in revenues next year, which at a P/S multiple of 9 would give you a price target of about $232.

That’s not an unreasonable multiple considering how much faster Celsius is growing than Monster, with 2024 expected revenue growth of 40% nearly four times that of the 11.3% that Monster is expected to see. My projected price wouldn’t even be the highest target among street analysts, as one analyst sees the stock worth $250. The average price target is currently over $209, implying roughly $40 of upside from current levels. Celsius shares have also come back down to their 50-day moving average, the purple line in the chart below, which should be a level of support. I believe that the recent fall is mainly due to a shift away from growth names after the recent Federal Reserve meeting. With rates likely to stay higher for longer, the market has recently shied away a bit from high growth names like Celsius, as higher rates usually compress market valuations.

The valuation angle is the biggest risk for investors in my opinion today. As Celsius works off much higher base numbers for revenues, the sales growth percentage figure will naturally come down. It’s possible that as investors see this number drop to say the 25-50% range later next year from the current 100%, they may not be willing to pay as much of a premium for shares. If moving forward the market decides that a price to sales ratio of 5 is warranted, for example, that would mean about 23% downside next year even on $2 billion of revenues that would still be quite a bit higher than the street expects.

In the end, the pullback in Celsius shares is one that investors should take a look at. The company continues to blow out street revenue estimates, and now it is starting to deliver some decent profits as well. With the growth story in the coming years expected to greatly outpace competitors and the overall sector, you’re not really paying a tremendous premium thanks to the recent $30 drop. The distribution deal with Pepsi has strengthened the business considerably, so a continuation of this strong growth story could easily result in shares hitting new highs sometime next year.