Celsius: Uncertain But Interesting

seekingalpha11-20 18:44

Celsius' unique positioning as a "better for you" energy drink with scientific backing and celebrity endorsements drives brand awareness and consumer interest.The business model relies heavily on ...

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SolStock  Intro Celsius (NASDAQ:CELH) is a maker of ‘healthy’ energy drinks - with claims to boost a drinker’s metabolism, energy levels, and reduce fat, all while being made with beneficial amino acids, vitamins, and other nutritious supplements. Their website highlights a mixture of ingredients meant to boost fat loss for drinkers who pair Celsius beverages after working out, including green tea extract (increases metabolism), guarana seed extract (double the caffeine of coffee beans), ginger root (supports digestion), vitamin B (recovery from fatigue), vitamin C (boosts the immune system) and chromium (mineral that enhances the metabolism of proteins, carbohydrates, and lipids). While we are not scientists, these claims are certainly different from those of other energy drinks, which typically are known across the consumer base as unhealthy, cheap options for a quick hit of energy that drains you later on. Thankfully, on their website, CELH has published 6 scientific case studies conducted at various universities that purportedly emphasize the positive health benefits their users experience - in terms of weight loss, fat burn, boost in metabolism, and even physical characteristics - faster sprints and increased muscle mass. These studies have been presented at various scientific conferences and have all been peer-reviewed to maintain legitimacy and bolster consumer confidence. CELH has also been very focused on increasing its brand awareness by collaborating and garnering endorsements from celebrities and influencers. Jake Paul, a controversial YouTuber, but one with over 20M subscribers, has endorsed the product and even wore Celsius branded trunks to a boxing match. Additionally, they have partnered with influencer David Dobrik, hosting celebrity pickleball tournaments with individuals such as Taylor Lautner, Olivia Culpo, and other stars involved. While celebrity endorsements can often be gimmicky and fickle, it still goes to show that CELH has potentially earned a spot in pop culture and the mind share of the massive followings that some of these celebrities have. The company’s usage of social media and development of its online presence lends itself to increased exposure to a large group of potential customers across geographic regions. Overall, as you will see, we are cautiously bullish on CELH and believe it to be a potential speculative opportunity. Business Model CELH primarily sells its products via third-party distributors, of which Pepsi is the largest by far. According to CELH’s latest 10K, sales via Pepsi made up 59.4% of total revenue for the company. While CELH’s primary distributor in the US and Canada is Pepsi, they also work with other distributors internationally, like Qifeng in China. CELH has a similar structure when it comes to manufacturing of its products. The company sources most of the necessary ingredients and all of the packaging material and provides it to co-packers to handle the actual manufacturing. With such a partner-heavy business model, CELH is able to focus on their core business of creating and marketing their products instead of spending resources on figuring out global distribution and manufacturing. However, this also comes with major risks because the company is significantly reliant on its partners to stay in business. Pepsi especially represents a large risk, with almost 60% of revenue dependent on their continual business. Market Presence, Positioning, and Growth In their annual filings, CELH highlights the following names as their primary competition: Monster, Red Bull, Coca-Cola, Pepsi, Keurig Dr. Pepper, Nestle, BlueTriton Brands, Starbucks, and Congo Brands. CELH competes with other players both recognized for their packaged drink products, as well as others who are more well known as QSR brands (Starbucks). According to the CEO, John Fieldly, a core tenet of their product strategy is to position themselves as a “Better for You” option - and this is highlighted in their physical positioning as well. Often, CELH products are found in the health and beauty aisles of grocery stores, and have offerings in many gyms and health clubs as well. Reiterating their position of being more premium than the rest, the company has also partnered with Ferrari and Inter Miami (the club that Messi plays for) to leverage their widespread brands at events to maximize the top-funnel awareness of the company. Along with their celebrity outreach campaign discussed above, CELH is focusing on growing target population awareness first and foremost to amplify their potential customer base. Fieldly led CELH’s repositioning into a health oriented lifestyle brand, and their strong increase in top and bottom lines reflect successful management and vision. The most material difference outside of the beverages themselves is that compared to the other players in the energy drink space, CELH positions themselves as a lifestyle - something that all athletes both professional and amateur should strive to embody. This ‘mantra’, along with their many endorsers and company partnerships, could lead to continually increasing cache within the mindsets of consumers to further stand out from the pack. This growth in mind share is evident in their increase in Amazon direct-to-consumer sales, which, per their last earnings report, rose 21% to around $27M in Q3 2024 on a year-over-year basis. We believe that this is a crucial metric to watch in their future earnings calls, as this could be a proxy to show how CELH products have evolved from an afterthought / convenience buy at corner stores to bulk purchases made online, shipped directly to consumers, as part of their regular shopping and routines. Online sales growth both in the US and internationally represent two high-potential segments of future growth that can help to continue setting CELH apart from its competition as it grows its business. Financial Highlights When evaluating a company’s financials, there are 4 major areas we like to start with to get a good initial idea of their position: revenue growth, balance sheet stability, cash flow generation, and profitability. Below are some interesting stats we have found in each of the categories. Revenue Growth  CELH’s last 10 years of revenue growth look exponential, with a CAGR of around 60%. In the last 3 years, it has been even higher at around 100%. Starting in 2020, all the way through the most recently reported FY (2023), CELH’s yearly revenue has essentially doubled that of the previous year.  Balance Sheet Stability  0.0047 debt to equity ratio 4.71 current ratio $5.8 million in total debt  Cash Flow Generation  Historically, the company has had very low or negative operating cash flows but in the last 2 years (2022 and 2023), they have turned their cash flows decidedly positive at $108 million and $141 million respectively. CELH’s free cash flows follow a similar trend as their operating cash flows.  Profitability  Over the last 10 years, CELH’s gross profit has grown at a CAGR of around 60% which follows their revenue trend. This is evident in their gross profit margin, which has held relatively steady with a CAGR of 2%. We are unable to calculate a meaningful net income CAGR for CELH for the last 10 years because their net income was negative for the first 5. If we instead look at the CAGR starting in the first positive net income year (2019) for a total of 5 years, we see a growth of around 100%. In the last 3 years, that growth is even higher, at over 500%. Looking at the net margin over the last 5 years, we are actually seeing almost no movement, with a CAGR of <1%. This means that revenues and costs have increased the same amount in that timeframe, on a relative basis. In contrast, the last 3 years show a net margin CAGR of over 200%. All of this goes to show that CELH is growing rapidly, but its net income and margins are still fluctuating dramatically and have not stabilized for the long term.  At a high level, the numbers for CELH look good. Seeing double-digit growth in either revenue or net income is always a positive sign, but seeing the same growth over a decade with signs of acceleration is exceptional. Additionally, an almost negligible debt to equity ratio, a high current ratio of almost 5 and very low debt all indicate a healthy balance sheet for the company. Finally, the cash flow generation is not particularly impressive but is showing signs of growth in recent years. However, we do see some potential concerns. The company’s net income growth looks good on the surface but raises some questions when you look at the trend. They held steady at slightly positive or slightly negative net income (never more than $11 million in either direction) for 8 years and then saw a huge drop in 2022 to a $199 million loss, which was offset by a big $182 million gain in 2023. After considering that the total net income over the last 3 FYs was -$13 million, a 500% CAGR over those 3 years does not sound as compelling. Overall, while the metrics look strong on the surface, we caution against using them blindly to make any investment decisions in CELH. Valuation We used a DCF valuation to determine the fair value of CELH shares with a bull and bear case. The bull case assumes a 50% growth rate (extremely high, but the 3-year revenue CAGR is ~100% and the 10-year revenue CAGR is ~60%, which we first discounted to 50% and then applied it as a proxy for FCF growth). For the bear case, we halved the bull case growth rate to show significantly slower growth at 25%. CELH’s future growth is uncertain due to their volatile nature, reliance on a single highly concentrated customer, and possibility of falling out of mainstream culture. Because of that, we decided to model 2 dramatically different scenarios in order to understand the potential realm of possibilities when it comes to CELH.   Doodad Capital We used the following as inputs - the terminal growth rate of 5% remained static for both bull and bear cases, as well as the WACC of 11.9%.   Doodad Capital Given these two differing scenarios, where one shows ~160% appreciation and one shows a ~6% dip from the current price of ~$27, we believe that the most likely outcome is something in between that range. Of course, this is a forecast and not meant to be taken as law, but this gives some directional guidance as to the variance in scenarios moving forward. Latest Earnings and Risks CELH reported earnings on November 6, and the stock dropped ~10% following their results. The numbers were certainly troublesome, as Q3 revenue was down 31% compared to the same quarter in the previous year to $266M and astoundingly, their net income dipped 92% to $6.4M. These are shockingly low, but now that earnings are in the rearview mirror, we are looking at this as a possible opportunity. A big driver for the drop was that their main distribution partner, PepsiCo, ordered less inventory as they still had a stockpile from previous quarters when they overbought. Despite this, CELH still reported strong growth internationally, up 37% YoY and a slight increase in gross margins (up 2.1% on a YTD comparison between 2023 and 2024). We believe that this quarter’s results highlight the main issue that we can see with CELH - their overreliance on one main partner leads to significant concentration risk. Our approach here is that this cyclical situation regarding inventory appears to 1) have settled as PepsiCo works down its on-hand products, and 2) have already been reflected in the stock price. Despite this material risk with their major partner, investor, and distributor, they are still locked in contractually until 2041 at the earliest. Pepsi has also invested about half a billion dollars into CELH, which will help with further distribution, branding, marketing, and hopefully, increases in market share. This shows us that both parties are committed to being engaged and mutually benefiting for the long term. In addition to concentration risk with their partner Pepsi, there are 2 other risks that investors should keep in mind. Firstly, aligning oneself with sometimes controversial celebrities and influencers runs the risk of someone doing something “unsavory” while affiliated with your product, which could impact sales in a negative manner if consumers associate the brand with the influencer. Secondly, we want to highlight the risk that there are numerous competitors active in this packaged drink market, and there is the chance a larger competitor could try to branch into CELH’s niche of “Better for You” beverages. Despite this being a possibility, we believe that the mind share and consumer loyalty that CELH has built up will be its strongest defense against any future competition. Conclusion  CELH is a leading beverage brand in the “better for you” niche of energy drinks, and it is growing rapidly both in the US and internationally. Its stock has dropped over 70% since its peak in May 2024, and its latest earnings certainly included some eye-popping negative figures. With all of this being said, we are beginning to be quite intrigued by the long-term opportunity this represents. Its valuation is at a multi-year low and if you believe in the bull case of growth, there appears to be strong share appreciation ahead. This is a high risk, high reward investment at these prices, and CELH is quickly approaching a range where we would be speculative buyers for the long term. Will the stock return to near $100 anytime soon? Most likely not - but at these prices, the downside risk is lower, and we believe that with reasonable growth, shares should be higher than where they currently sit in the mid $20s. 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