Celsius (CELH -2.81%) was once the talk of the town among investors. In the five-year period leading up to the stock’s Mar. 2024 all-time high, it surged more than 7,300%. The business was putting up ridiculous growth numbers year after year.
However, the remainder of 2024 was a rude awakening as sales started to come under pressure. The beverage stock is 64% off its peak, as of this writing, despite climbing 44% in the past three months. Clearly, volatility is still a major part of the story.
Celsius is trading below $40 right now. Should you buy it hand over fist and hold for the next 20 years?
Rising up in the energy drink market
The energy drink industry is dominated by Monster Beverage and Red Bull. Combined, they have 64.3% domestic market share. Celsius is in third place behind these two heavyweights.
Celsius rose to that position after its revenue skyrocketed 18-fold between 2019 and 2024. That’s not a typo. With health-conscious drinks that supposedly boost metabolism, the company has attracted consumers interested in fitness and wellness. A distribution deal with PepsiCo has also helped Celsius expand its presence both domestically and internationally.
In February, the company announced that it would acquire Alani Nu, a smaller energy drink business with a similar focus on health-forward products, for $1.8 billion. In 2024, Alani Nu posted 64% retail sales growth, faster than any competitor, and the brand gives Celsius exposure to a younger female demographic.
Try not to extrapolate
In the midst of Celsius’s incredible run, it would’ve been difficult for investors not to get excited. They may have even fallen into the trap of believing the good times would only continue, but no company can permanently sustain the growth rates Celsius was reporting.
The stock’s steep decline over the past year speaks to the risk that comes with investing in hypergrowth stocks. Between 2024 and 2027, Wall Street estimates call for revenue to increase at a compound annual rate of 25%. While this is still an impressive pace, it marks a notable slowdown from the 78% growth rate of the past five years. Expectations were just too high.
It’s also worth reevaluating the Alani Nu transaction. The timing of the acquisition does not suggest Celsius is pursuing it from a position of strength. If anything, it could be an admission from leadership that organic growth will be harder to come by going forward.
Competition in the energy drink space is still incredibly fierce, and Celsius may not find it so easy going forward to take market share. Monster and Red Bull can leverage their brand power and scale to reinforce their industry positions. They’ve also released their own health-focused options to appeal to Celsius’s core customers.
Any investor would love to be able to buy and hold a winning stock for 20 years. However, it’s difficult to look that far out. The best thing to do is to find businesses with wide economic moats that can defend themselves against competitive threats. It’s not clear yet that Celsius has developed such sustainable competitive advantages.
The market still has high hopes
It’s critical that investors consider a stock’s valuation as a gauge of the market’s expectations. Pay too high a price, and it can negatively affect your potential returns down the road. Celsius trades at a forward price-to-earnings (P/E) ratio of 42 as of this writing.
While this valuation is much cheaper than it was a year ago, it still represents a large premium to the broad market. Even after the 64% decline from its all-time high, the stock is still priced with the expectation that it has a long growth runway ahead of it. That’s far from certain given the company’s two quarter’s of declining revenue on a year-over-year basis.
Investors should think twice before buying shares, even though they trade below $40.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius and Monster Beverage. The Motley Fool has a disclosure policy.
