Deep dive into Celsius $CELH – Is it becoming Monster Beverage 2.0?

It has been a while since I shared an analysis of a public company, and it is time to change that.

Celsius ($CELH) is riding on top of the memories of the exceptional returns of Monster Beverage. Is Celsius becoming Monster Beverage 2.0? To answer this question, I’ll walk you through plenty of information that I think anyone interested in the company should be aware of.

1.0 The Bull Case

In 2023, Celsius had revenue comparable to Monster Beverage back in 2010. However, as a company, it is growing at a much faster pace. In the 4 years prior:

• Celsius grew from $75m to $1.3 billion

• Monster Beverage grew from $606 million to $1.3 billion

This brings a lot of excitement and the main question is – Will the revenue growth continue in the next decades?

Since 2010, the share price of Monster Beverage is up over 1,000% (vs. 350% for the S&P500).

2.0 Pepsi – The key stakeholder

Before we dive into all the fun stuff, it is important to introduce Pepsi, I’ll argue, the most important stakeholder. It is not only the exclusive distributor but also owns part of Celsius through so-called mezzanine financing (a hybrid of debt and equity). The ownership is slightly less than 10% and it is enough to align the incentives. This also opens the door to a potential acquisition in the future.

Pepsi accounts for almost 60% of all the Celsius sales. You might wonder, wait a second, isn’t Celsius selling products to the final customers? Ultimately, yes. However, the customers’ definition of Celsius is Distributors, Brick-and-mortar outlets, club stores, and health-focused locations.

Distribution is key in a business of this kind. Ideally, you’d like to partner with someone who has a large reach and can quickly distribute the product to the final customer. Pepsi is a great match. However, given its size, it has a lot of negotiation leverage, especially when it comes to pricing.

3.0 The bull case tested

For Celsius to follow in the footsteps of Monster Beverage, it needs to grow, a lot. In my opinion, there are 3 ways for that to happen:

1. Expand into new markets

North America accounts for 96% of all the revenue that Celsius brings. For comparison, this is only 65% for Monster Beverage. The good news is: There is a lot of room for expansion, and the company is already working on this. During 2024, sales are expected to begin in Canada, the UK, Ireland, Australia, New Zealand, and France.

1. Steal market share from its competitors (in existing markets)

Based on the Q1 data, Celsius holds the #3 spot in the U.S. energy drinks market with a market share of 11.4%. This is definitely impressive growth. However, the latest data show that its market share has decreased to 10.5% – which indicates that the upper limit is being reached. In addition, on June 11, Celsius’ management shared that Pepsi would reduce inventories of the energy drink by another $20-$30 million in the second quarter, which followed a $45 million reduction in the first quarter. This could be another indication that the supply outweighs demand and the hypergrowth days might be over.

Let’s not forget, this is a tough landscape to compete with. Red Bull, Monster Beverage, and even Pepsi are direct competitors.

1. Introduce new products (expand into new verticals)

Lastly, for a company to innovate, it needs to invest in Research and Development.

Unfortunately, there isn’t much of that happening. The R&D expense is below 0.1% of revenue, so I don’t have high expectations for new products or verticals (such as protein bars) unless it comes through an acquisition.

4.0 Historical financial performance

The company is in charge of development and marketing, while the manufacturing is outsourced. This, combined with Pepsi’s distribution, allowed the company to grow at this incredible pace, without having to invest too much.

However, profitability-wise, it is lagging behind Monster Beverage:

• 50% gross margin (vs. 55% of Monster Beverage)
• 22% operating margin (vs. 29% of Monster Beverage)

It is quite clear that Celsius isn’t at the same level.

5.0 Valuation

Based on my assumptions, the company will continue to grow, although, at a lower pace than analysts currently expect. Here are my assumptions:

• Revenue growth is to decrease to 20% over the next 5 years

• Operating margin to increase to 23% (much lower than Monster Beverage)

Based on my assumptions, the value of the company is roughly $10 billion (after adjusting for cash/debt), or $43/share (below the current price of $59).

Here’s how the valuation (per share) changes if you have different assumptions than mine regarding the revenue growth over the next decade and its operating margin:

Currently, the market price is $59, which implies high expected growth for an extended period of time. If the growth rate decreases below 25%, I do expect a significant market reaction.

However, if you believe Celsius is the next Monster Beverage, will grow at the same pace for an extended period of time, and will reach the 29% operating margin, then the company is undervalued.

Should the price drop below $40, I might revisit the company and see if my thesis is still intact. Until then, I’m happy to follow the company from the sidelines.

I hope you enjoyed this post, feel free to share your thoughts.