The market has been on a volatile ride since its July highs, though the S&P 500 Index ($SPX) is now just 2% away from revisiting those all-time records. At the same time, some previously high-flying growth stocks have undergone significantly deeper corrections - creating potential buy opportunities for long-term investors with healthy risk appetites.
In particular, many growth stocks now have more down-to-earth valuations following recent pullbacks, creating some discounted opportunities for investors to participate in growth stocks that have a track record of yielding robust returns.
While discussions of hypergrowth stocks with premium valuations might immediately bring to mind the artificial intelligence (AI) niche of the market, there's one top growth stock in the beverage industry that stands out for its newly discounted valuation and promising upside potential.
About Celsius Stock
Celsius Holdings (CELH) is a pioneer player in the beverage industry, best-known for its eponymous energy drink. It ranks as the third-largest energy drink brand in the U.S., and gained significant popularity during the COVID period and attracted young consumers with its CELSIUS beverage, distinguished by its unique taste and health-conscious appeal.
The company's revenue growth has been explosive, rising from $75 million in fiscal 2019 to $1.3 billion in 2023, and registering a compound annual growth rate (CAGR) of nearly 100% over the past three years.
Valued at $7.71 billion by market cap, Celsius stock has corrected dramatically after a big run higher to start 2024. The stock is down more than 67% from its March highs just below $100 per share, and CELH is now off 40% on a year-to-date basis.
Over the longer term, though, the growth stock remains a standout performer, having surged 2,700% higher in the past five years.
The steep drop in CELH in recent months is largely tied to concerns over slower growth attributed to its main distributor, PepsiCo (PEP), which has faced challenges in managing inventory effectively, leading to disruptions in product distribution and sales.
Following this correction, CELH stock is now trading at 5.36x forward sales - not necessarily cheap compared to the broader beverage industry, but a discount of more than 50% to the stock's own historical average multiple of 12x forward sales.
Celsius Beats Estimates in Q2
Celsius announced its Q2 earnings for 2024 on Aug. 6, which exceeded expectations on both the top and bottom lines. However, CELH shares fell by more than 2% following the earnings release.
Q2 sales reached $402 million, up 23% from the previous year, and surpassed estimates by $9.2 million. These results were driven by stronger sales from Amazon, which recorded a 41% increase, along with a 30% jump in international sales.
Net income surged to $79.8 million, marking a 55% year-over-year increase. Moreover, the company earned a profit of $0.28 per share, achieving 65% growth from the same quarter the previous year.
On the balance sheet side, Celsius raised its cash and cash equivalents to $903 million, a 19% improvement from year-end 2023 levels. These figures demonstrate the company's strong financial health and increased profitability.
Analysts are looking for full-year revenue growth of just 9.2% this year, while EPS is expected to rise by 11% in the same period.
Partnership Between Celsius and PepsiCo
The relationship between PepsiCo and Celsius primarily began in 2022, when PepsiCo invested $550 million into Celsius and acquired an 8.5% stake in the company. This partnership aimed to enhance CELH's distribution, particularly in the U.S. convenience and gas channel, which is a crucial market segment for energy drinks. PepsiCo's global reach was expected to help Celsius expand both domestically and internationally.
However, there have been challenges, particularly with inventory management, that have impacted Celsius's business operations. Overstocking issues with PepsiCo as a distributor, which initially contributed to the company's outsized revenue growth, have now slowed down the business momentum for Celsius.
Earlier this month, Celsius management confirmed that Pepsi is set to order between $100 million and $120 million less in the current third quarter, on a year over year basis. While investors sold the news, this should allow both companies to realign the supply chain and improve inventory management practices to better match the actual market demand and reduce the financial impact of overstocking.
What Do Analysts Think About Celsius Stock?
Following the inventory update, BofA Securities cut their CELH price target from $32 to $26. The firm maintained its “Underperform” rating on Celsius stock. Elsewhere, Morgan Stanley cut its Q3 and full-year sales estimates for Celsius Holdings, but backed its price target of $50 and “Equal Weight” rating.
Overall, Celsius still has a consensus “Strong Buy” rating on Wall Street. Of 15 analysts covering the stock, 12 recommend a "strong buy," two have assigned a "hold," and one suggests a "moderate sell" rating.
The average 12-month price target of $53.14 indicates approximately 60.5% upside potential from current levels.
What's the Bottom Line on CELH?
Despite reduced demand in the energy drink sector, Celsius Holdings is the third-largest brand after Monster (MNST) and Red Bull, and appears to be taking market share from both. Recent Circana data shows a market share of 11.5% for Celsius, up from single digits last year - while both of its rivals lost share during the period. The company's expansion into Europe and Asia is also gaining traction, and is poised to enhance its global scale.
With the energy drink industry projected to grow by 8% annually until 2030, the company's rising market share and improving inventory controls should bode well for more upside in Celsius going forward, particularly with valuations down significantly from historical averages.
On the date of publication, Nauman Khan did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
