Can Celsius Be A Monster Stock?

A quick quiz... if I were to ask you what you thought the best-performing S&P 500 stock since 2000 was, what would you guess?

Apple (AAPL)? Certainly a solid choice. Since 2000, Apple has gone from a niche computer maker that barely turned a profit, to a consumer electronics powerhouse, adding the iPod, iPhone, iPad, Apple Watch, App Store, and a massive collection of services. Now the largest public company by market cap, Apple has made fortunes for its investors, up 14,000% in the last 2+ decades. But is not the best performing stock.

Netflix (NFLX)? Good idea! At the turn of the century, Netflix was an infant company trying to compete against a dominant juggernaut in Blockbuster with a novel DVD-by-mail service. Today, it is the pre-eminent video streaming service in the world, with over 230 million subscribers - nearly 8 times the subscriber base of cable giant Comcast! The stock is up over 30,000%, making early investors very wealthy. But... it is not the best performing stock!

Would you believe the best performing stock of the last 23 years is energy drink purveyor Monster Energy (MNST)? That's right, at an unfathomable 110,000% gain since 2000, this company would have turned a $10,000 investment into a cool $11 million dollars. Even if you were late to the party and waited until 2010 to invest (when Monster was already well known), you'd still be sitting on a nice 14-bagger, a 23% annual return.

Which brings us to today's Green Screen stock review.

Right now in the Green Screens, there is a company that looks very much like Monster Energy circa 2010. And while there is no guarantee it will see the same kind of success, as the saying goes, history does tend to rhyme. The stock is already a 16 bagger since 2018, and has a lot more room to run.

The company is Celsius Holdings (CELH). Let's do an in-depth analysis.

A "Monster" Trajectory

Celsius, like Monster, makes and markets energy drinks under its Celsius, Celsius Heat, and Celsius BCAAS brand names. The company's marketing edge is that its drinks are "clinically proven to boost your metabolism and help you burn body fat". The brand started out at gyms and nutrition stores, but can now be found pretty much anywhere, from Amazon and Walmart down to your local gas station convenience store.

Energy drinks are a crowded category. Celsius, though, has clearly caught on. Virtually unknown 5 years ago, sales have increased at a 3 year annual rate exceeding 105% as the firm has built out distribution and shrewdly marketed its brand. Today, Celsius is a real player, the #3 brand in the U.S. energy drink market, behind only Monster and Red Bull.

Another parallel with Monster is Celsius' recent distribution deal with Pepsico (PEP). Announced back in August, Pepsi will take over all of Celsius' distribution and also invested $550 million in the company for an 8.5% ownership stake. This is quite reminiscent of Coca-Cola's (KO) $2 billion, 17% stake investment and assumption of Monster Energy's distribution back in 2014.

I see this agreement as critical for Celsius to really make inroads in the $90 billion energy drinks market. It has already allowed Celsius to triple its availability, with locations increasing to nearly 180,000 from 60,000 a year ago. Pepsi can carve out expanded shelf space at supermarkets and convenience stores, and provide additional marketing resources. Perhaps most importantly, it allows Celsius to consolidate its distribution, which will be a major boon to gross margins as maintaining a fragmented distribution network is expensive and complex.

That's really the pitch for Celsius in a nutshell. It is a rapidly growing brand in a large industry that is growing at 8-9% annually. A distribution deal with one of the largest beverage firms in the world should allow it to continue taking market share at higher gross margins. The firm is currently delivering revenue growth at 70% year-over-year, and it seems reasonable to expect 30%+ sales increases for the next several years (at least).

These are reasonably recurring revenues as well. Beverages are short-term consumables that are often purchased over and over again by the same customers.

With the growth thesis laid out, let's look at a few other characteristics of the company to see if it might make the cut for our Watch List.

Can Celsius Build A Moat?

Economic moats in the consumer products space boil down to 1 main possibility: brand.

Brand moats are something a lot of investors tend to misunderstand, though. Just because a brand has wide recognition does not mean it is a competitive advantage. A company's brand must do one of two things. It must either allow the company to charge materially higher prices for essentially the same product/service, or it must represent an "automatic purchase", lowering search costs for the consumer in oft-crowded categories.

Celsius isn't there yet, in my opinion. Celsius products go on Amazon for anywhere from $0.14-17 per fluid ounce, a bit higher than Monster's $0.10-13 but below Red Bull's $0.18-0.22. Either way, this isn't the sustainable higher price gap we'd need to see for a brand pricing moat.

It's possible that over time Celsius might be able to grasp an "automatic purchase" advantage for its brand as one of just a handful of well-known energy drinks. With 35% market share each, it's fair to say that Red Bull and Monster can claim this advantage at present. For Celsius at 6% market share, there is a long way to go. The Pepsi deal gives the company a chance on the distribution side, but it will cost a lot more marketing dollars and take many more years.

There are also low barriers to entry. New energy drinks come and go every year. Just a quick search on Amazon turns up tons of brands: Cellucore C4, Jocko GO, CLEAN Cause, Reign, Ryse Fuel... not to mention brand extensions like Pepsi Nitro, Mountain Dew Energy, Gatorade G2, etc. The list is endless. Celsius will always face lots of competition.

The one good thing is that the energy drink market is very large at $90 billion, and growing 8-9% annually. That creates enough space for numerous success stories. Celsius doesn't have to "win" the category to be successful - but it does need to maintain one of the top 3 or 4 brands to succeed long-term as an investment.

Management and Financials

Celsius has a checkered history. It was founded by Steve Haley in 2004, but he ran into financial challenges, lost a key Costco deal, and cashed out to vitamin mogul Carl DeSantis in 2011. The next several years saw the company start to lay the distribution and marketing groundwork needed for sustained success, led by CEO Gerry David and CFO John Fieldly. David retired in 2018 and Fieldly stepped into the CEO seat, where he remains today.

The company's performance under Fieldly has been pretty impressive, to say the least. Revenues have risen from just $53 million in 2018 to over $650 million in the 2022 fiscal year. The stock price has risen over 1,600%, a ridiculous 74% annualized return. He negotiated the Pepsi deal which gives Celsius a real chance to become one of the premier energy drink brands in the world. Under his leadership, the company has thrived. Only in his early 40's, he can continue leading the firm for decades.

DeSantis remains with his 30% stake - he's now a billionaire from his ownership in Celsius. Respected investment firm Blackrock also holds an 8% stake. Fieldly's stake is not huge on a percentage of shares basis - just 2% - but on an absolute basis it is worth over $100 million, hardly chump change.

Financially, Celsius is showing improvement. Their cash flow metrics had not been impressive over the past few years, but post-Pepsi, we saw a marked improvement in 2022, generating over $100 million in free cash flow at a 16% margin. I expect continued improvement, as Pepsi makes their distribution much simpler and less expensive. This should also manifest in gross margins, which have risen to 44% from the low 40's pre-Pepsi. Given that Monster does close to 60% gross margins at lower unit prices, I think there is a lot of potential for continued improvement in gross margins going forward.

There is no immediate balance sheet risk, either, as Celsius is a debt-free company.

Risks

Celsius would fall into the "high" risk category of Green Screen stocks.

Competition is concern #1. Energy drink entries continue to enter the market from all angles, including from Coke and Pepsi, and Celsius will have to continue to execute to gain market share. The Pepsi deal gives it a clear advantage over smaller entrants, but that's not rock solid either. Former competitor Bang Energy exited their own distribution deal with Pepsi in 2022 over "gross misconduct", then ended up going bankrupt later that year. A similar scenario with Celsius would be absolutely devastating to the investment, obviously.

There are also a few concerns around the company specifically. There were several lawsuits filed against the firm after it failed to timely file their 2021 annual report over "unidentified material errors" in previous filings. In response, the firm hired "big 4" accountant Ernst & Young to shore up its filings, but we want to be wary about accounting issues. There have also been high profile lawsuits the company had to settle for misleading labeling and failing to pay royalties to celebrities.

While none of these seem to be materially damaging in their own right, we want to be conscious of any cultural issues within the firm that could be behind them. Continuing reputational issues, and certainly any lingering accounting concerns, are risks for potential investors to consider before buying in.

Conclusion

Celsius is a tough call. On one hand, the growth trajectory and potential for a multi-bagger is pretty enticing. While it is far too late to get those 20-year returns as from Monster, there is still plenty of potential to earn a 2, 3, or even 4 bagger from this stock over the next 5 years. It's a big, growing industry, one of the leaders (Red Bull) is a stagnant brand, and it has a major force in distribution (Pepsi) standing behind it.

On the other hand, there are clear risks, including competition, Pepsi's questionable history as a distribution partner, and the clear need for continuing rapid growth to justify the valuation.

Ultimately, I've decided to go ahead and add Celsius as a growth pick. I think it makes a nice wild card stock, as most of our picks so far have been relatively conservative, larger companies. I tried to balance reasonable growth and margin assumptions based on both the company's trajectory and examples from competitors like Monster, all while applying a healthy discount to account for uncertainty in the fair value estimate.

The end result was a fair value estimate of $112. That puts the stock right around the 25% discount mark we look for. For now, I'm leaving it in the Watch List, but with a few more percentage points of safety margin, we could trigger a buy quite soon.