Celsius (NASDAQ: CELH) is one of the best-performing stocks. In the five-year period leading up to its record high in March 2024, shares were up more than 7,300%. A $10,000 investment five years ago would've turned into $743,000 at its peak.
But as of July 29, this once-booming growth stock was trading 52% below its peak price. Investor sentiment is clearly cooling down. Does this more attractive setup mean that Celsius is a no-brainer buy right now?
Exciting growth
This company's shares have still crushed it for investors in recent years, mainly because Celsius' growth has been incredible. In 2023, the business reported sales of $1.3 billion. This was up 102% year over year and up a jaw-dropping tenfold compared to 2020. You'd struggle to find companies with this type of meteoric rise.
To be clear, the growth has slowed. Revenue rose 33% through the first three months of 2023. That marks a slowdown that might be the reason that stock has fallen, but it's still a healthy pace.
While the non-alcoholic ready-to-drink market is very mature, the energy drink area is experiencing much faster gains. And by positioning its beverages as having healthful properties, Celsius is a hit among consumers.
Expanding distribution is also working wonders. The company's drinks can be found in a wide range of retail settings, like grocery stores, fitness centers, and gas stations. PepsiCo has an equity stake in the business, and it's also Celsius' distribution partner both domestically and globally. That can help to expand visibility and selling points. Moreover, Celsius has found meaningful success online, particularly selling on Amazon.
Investors are right to question if a fast-growing enterprise like this is earning profits. In this instance, the income statement looks solid. Celsius reported $83 million in operating income in 2023, good for a margin of 23%.
Still paying up
Even with Celsius taking a nosedive and trading 52% below its all-time high from earlier this year, the stock still looks expensive. It trades at a price-to-earnings ratio of 51. This is much lower than the multiple of 125 at the peak earlier this year. But in my opinion, the market remains very optimistic about Celsius' prospects.
I believe investors are pricing in the certainty that the business can increase its revenue at the same pace it has in recent years, something I don't think is likely. Growth is already slowing down. And according to Wall Street consensus analyst estimates, Celsius' sales are projected to rise at an annualized pace of 26% between 2023 and 2026, much lower than the rate investors are accustomed to.
Investors who have a long-term horizon should want to own businesses that possess an economic moat that protects them against competition. It's hard to argue that this business has one.
For starters, there are basically no barriers to entry in the industry. Anyone with capital, marketing skills, and an idea can probably start an energy drink enterprise. Even celebrities, like The Rock (via Zoa) and Jake Paul (via Prime), have entered this market.
In other words, there is nothing preventing well-funded entrepreneurs, particularly those who can capitalize on their brand recognition, from developing and selling their own energy drinks. I suspect this type of activity isn't going to end anytime soon, which means that Celsius' competition will remain extremely tough. And this doesn't even take into account existing industry heavyweights, like Monster Beverage and Red Bull.
And from a consumer perspective, there are no switching costs. There might be some brand loyalty, but there is nothing stopping people from purchasing whatever energy drink they want to try. Consequently, it's a requirement for Celsius to keep spending on marketing efforts to remain on the top of consumers' minds.
These negative qualities are why I still believe that Celsius is not a smart stock to buy today.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Celsius, and Monster Beverage. The Motley Fool has a disclosure policy.
This Growth Stock Is Down 52%: Is It a No-Brainer Buy Right Now? was originally published by The Motley Fool