Celsius: It’s Time To Update The Thesis (Rating Upgrade) (NASDAQ:CELH)

supermimicryIn September 2023, I wrote my first article on Celsius. Since then, the stock has risen by more than 30%, but a lot has happened in this 8-month period. Today, it’s time to update some of my thoughts on Celsius Holdings, Inc. (NASDAQ:CELH). Thesis update As I already mentioned, in the previous article, Celsius’ value proposition is very different from that of traditional energy drinks. Celsius has managed to associate its drink with a healthier option, attracting a new audience to the sector, such as women or people over 50 years of age. This undoubtedly increases its TAM a lot, in fact, the company increasingly represents a greater percentage of the category’s incremental dollars. And, as they already said in the Q1 2024 conference call, the increase in consumption does not come from customers of other brands (23%), but from their own incremental dollars and from new customers in the category (42%). So even though they are stealing some customers from the competition, what they are really doing is expanding the category. Celsius-Q1-2024-Investor-Presentation.pdfIt is also worth noting that it is the only energy drink company capable of gaining more than 10% market share in North America in the last 10 years. And to show that this is not an exception, with just 2 months of presence in Canada, the company already had a 5.5% market share in the country, in addition to having more than 15% market share in 12 markets within the United States. Source: Monster Investors PresentationAll this is being achieved without the shelves product rotation already anticipated by retailers. In fact, this is only 1/3 of the way there. Celsius is not yet operating at full speed on this channel, in the rest, they are already the leader. For example, on Amazon, the most representative channel for its sales, since it competes on equal terms against Monster Beverage Corporation (MNST) or Red Bull, it is still number 1 in the category. When its rivals don’t have more shelf space, Celsius is the winning horse. Another aspect that differentiates Celsius from the competition is its versatility of use. 12% of sales come through food channels, that is, people use Celsius to eat and even have breakfast. This is one of the crucial points of the thesis that I will comment on later. Without a doubt, PepsiCo (PEP) has had a great influence in achieving this, and if you ask me, I think Celsius will end up being sold in franchises like Starbucks, since Pepsi is in charge of the distribution of its ready-to-drink products. Some might argue that Celsius could cannibalize sales of Starbucks coffees (I think so), but if the use of them is increasing while eating, this would make sense. Source: Author’s representationComments on Q1 Q1 sales growth fell to 39%, but in addition to coming from a very strong comparable base (+95% YoY from 2022 to 2023) there was a problem with Pepsi inventories. The impact of about $20M was due to an accumulation of stock by Pepsi, in view of a very large spring demand, which has not been seen this year. The miss in sales with this adjustment is 3%. They also said that they have released their best flavor to date, the Galaxy Vibe, which, in my opinion, is the most striking can. Another initiative to continue improving sales is that they now have more sales staff than ever. Furthermore, even with these extra expenses, margins have increased without raising prices, even being reduced in some products, due to promotions and product mix. In fact, if we look at the annual results, they spent 20% of sales on marketing, compared to 24% of last year, and they still have agreements with Ferrari in F1, with the American soccer league MLS, and with the Super Bowl. G&A expense as a percentage of sales was 8% for the 12 months of 2023 versus 12% in 2022. This speaks greatly of the marketing team and the economies of scale they are achieving. Source: TikrI wouldn’t get excited about the margins anyway. Not only because Celsius is not yet in that phase of the business’s life (it still has to focus on increasing its sales and gaining market share, as well as space in consumers’ minds). But because they expect to return to gross margins of the high 40%, due to increases in raw materials prices and increased promotional costs in summer. International Expansion This year they are being much more aggressive than I expected with their international expansion. Not only Canada, they also hope to be in the UK, Ireland, France, Australia and New Zealand before the end of the year. In fact, despite its association with Pepsi, the distributor in the UK will be made by Suntory Beverage. They do it this way because, as they have said, they have a lot of exposure to gyms, which is always the gateway to all these types of functional/energy drinks. This international expansion will also put some pressure on margins this year, since they do not have the scale or manufacturing structure that they have in the USA. So there will be some costs and some investments there. But they admit that they have more brand awareness than initially anticipated, thanks to social networks. I am from Spain, where it is not available yet, but I was able to try Celsius in 2021 when I spent a year living in Sweden. The truth is that at first I didn’t like the available flavors very much, plus I had been a Monster investor since early 2020, so at first, I was a little bearish with Celsius, and clearly I was wrong. Thanks to having followed the sector and the company for so many years, I have been able to mature many of these ideas that I have commented on in this and the other article. And speaking of ideas, the next section is an idea that I have been wanting to see for a couple of semesters. 0 Caffeine Products The idea of ​​a range of 0 caffeine products (or 80-100 ml instead of 200 ml) seems to me to match a lot with the trend we are seeing of Celsius increasingly being consumed during meals. This would massively increase their TAM as well as fight the unpopular opinion of having too much caffeine (more on this later). Celsius could even be consumed for dinner without affecting sleep, or the number of cans a person can consume throughout the day without abusing caffeine. I really think this would be a great move by the board, but there is a risk that could be preventing this. Risks The biggest risk I see for Celsius is that this idea would never materializes because of Pepsi. A caffeine-free product could cannibalize sales of some of the company’s products, for example Mountain Dew or Gatorade. Pepsi could be preventing the launch of this product, which could completely change the company, as it would penetrate new uses and further distance itself from the unpopular energy drinks category. One change that could materialize this idea is for Pepsi to increase its stake in Celsius. For this, Celsius stock price would have to go down. Let’s remember that the Pepsi purchased the 8.5% participation in Celsius back in 2022 for $25 (adjusted for the split), so now she may be willing to buy again in the $50 range, seeing the great popularity and potential international market of the product. It would seem like a great move on Pepsi’s part, especially when it is struggling to achieve organic growth. A news report that appeared on CNBC on the 28 of May, which I can’t find now (so I’m leaving the link to a tweet with the video), said that drinking several energy drinks a day negatively affected the liver. That day, the stock fell by 12%. I was very surprised with the negative reaction it had. It is as if the market did not know that abusing of drinking energy drinks (despite having fewer harmful results for health) was healthy. It’s like being surprised that drinking a bottle of vodka is bad. I think all this is short-term noise and we should already know the adverse effects that drinking too much can have. Lastly, a potential risk that apparently amounted to nothing and demonstrates Celsius’ merit in successfully penetrating such a complicated market was Monster’s launch of Reign Storm. Reign Storm is a functional drink intended to compete directly in Celsius’ niche, but it has shown very little traction among consumers. In fact, its Instagram account has only had 4,500 followers in 12 months. What was an event that worried me a little, since from Spain it is much more difficult to follow the situation of US consumers, has turned out to be not important. Valuation We’ve reached the final point of the article. The last few months have been very volatile for Celsius’ stock, and I think that if you don’t have a clear understanding of the company’s thesis, it can be a difficult stock to hold during downturns due to a loss of conviction. As I mentioned in the previous article, at this stage of the company’s life, I prefer to value it based on EV/Sales or EV/Gross Profit, since they should remain focused on gaining market share rather than seeking to increase margins just yet. Source: KoyfinI expect sales to grow at a rate of 25% CAGR over the next 5 years. This year and next, the growth rates might be higher, but I have projected it this way to simplify the process. Applying an 8x EV/Sales multiple (Monster’s average multiple in recent years has been 7x-7.5x, but I believe Celsius will grow more and is perceived as a better product). We arrive at a target market capitalization of $32.17 billion in 5 years, which translates to a 14.2% Internal Rate of Return. Source: Author’s representationOn the other hand, I decided to do another valuation exercise, although this one is much less precise. I believe that at some point, Celsius will surpass Monster’s current market capitalization of $55 billion. Therefore, I have calculated 3 scenarios ($40B, $60B, $80B) and their IRRs based on the price at which we buy Celsius ($73, $60, $50) and the time frame to achieve the target (by 2030 and 10 years, although the period may be longer). The results obtained are shown in the various tables in the image. Source: Author’s representationFor all these reasons, and despite potential short-term price corrections (I would be calm and even happy to buy more if Celsius were to drop to $50), I believe that any price below a $40 billion market capitalization (if we trust in the future we are projecting for the company) can be a good price. Considering all this and looking at the long term, I rate Celsius as a Buy. Conclusion This has been my update on the company thesis after many months. I believe the thesis is still on track, although it’s not been without its complications. I’m still closely watching for the launch of a caffeine-free product, as well as corrections to continue increasing my stake in the company. As I mentioned before, being from Spain, I can’t follow the product’s evolution firsthand, so I would be delighted to hear opinions or contributions from investors who have it available in their country.

Buy cryptocurrency

Source link

Refer And Earn Demat Account – Get ₹300 | Referral Program

Open Demat Account In Angel One For FREE