Quarterly earnings writeup for Celsius (CELH)
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My investment strategy is to own 20-30 high-quality growth stocks with the best fundamentals at the most reasonable valuations — if the fundamentals begin to disappoint or the valuation no longer looks compelling I will trim or sell my position. I’m trying to own a portfolio of stocks that have at least 50% upside within 1-2 years and at least 100% upside within 3-4 years. If I buy stocks that are too expensive or the fundamentals aren’t good enough or my investment thesis is weak — then I’ll never hit my investment targets. My primary objective is to maximize my performance to the upside while minimizing losses and drawdowns to the downside. I accomplish this by being very selective in what I own but also using technical analysis, stop losses and hedges to protect my portfolio and profits when the markets are pulling back.
In this post I’m going to cover the CELH earnings report from Thursday morning which you can see here… https://www.celsiusholdingsinc.com/wp-content/uploads/2024/02/8K_Press_Release_Final_Q4_2023_02.28.24-001.pdf
Over the past couple weeks I’ve sent our earnings commentary (all portfolio companies) for Super Micro (SMCI), Nvidia (NVDA), Meta (META), Uber (UBER), DraftKings (DKNG), Shift4 Payments (FOUR), TransMedics (TMDX), Elf Beauty (ELF), NU (NuBank), MELI (MercadoLibre), Sofi (SOFI), Aspen (ASPN) and Square/Block (SQ).
Over the next week I’ll be sending out earnings commentary for my remaining portfolio companies including Coupang (CPNG), Hims & Hers (HIMS) and several others.
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CELH — Celsius Holdings — 11.1% position — $79.27 per share
As many of you know I’ve been a CELH shareholder since May 2020 when the stock was trading in the $3’s which mean I’m up more than 2,400% since my first purchase — of course my average cost basis is much higher than that because I’ve been adding to that position almost every single month for the past 3.5+ years.
At the end of 2023, due to the fact that CELH was up so much, the position in my investment portfolio was getting too large and I felt reckless showing a 24% position on my spreadsheet (which all my paid subscribers have access to) so with that in mind I transferred 1/3 of my CELH into a separate account (if I still had those shares in my investment portfolio I’d be up ~100% YTD in my investment portfolio instead of just +95%). I am planning to hold these CELH shares long-term because I still believe CELH could be larger than MNST (Monster) one day however it could take another 10+ years and I don’t want short-term pullbacks to impact my decision making or performance.
With that said, all of my comments going forward (in this writeup) will only be in reference to my current investment portfolio (not including the separate account with a large chunk of CELH shares).
Over the past week I’ve trimmed my CELH position more than a dozen times which has cut my position by 50% which means I now have an 11.1% position in my investment portfolio (to properly reflect the risk/reward going forward) but the bigger news might be that CELH is no longer the largest position in my investment portfolio. Coming into 2023, CELH was my largest position (now up 45.4% YTD) and SMCI was my second largest position (now up +260% YTD, including after hours on Friday when it was announced they are going into the S&P 500) but I’ve had to trim both positions aggressively over the past month to lock in profits and reallocate capital into some other names.
As of yesterday’s close, TMDX is now the largest position in my investment portfolio because I believe the upside over the next 3-5 years is higher than the upside for CELH or SMCI over the next 3-5 years. I still like CELH and SMCI and have large positions in both but I believe TMDX has 200-300% upside over the next 3-5 years and I can’t say the same for CELH or SMCI, not at current valuations/multiples.
Back in mid-December, CELH had pulled back -30% from the all time high in September and was trading below $50. I was adding to my CELH position (and pounding the table) because the stock was trading at 38x 2024 EPS (using my estimates). I’ve been saying for the past 6+ months that I thought CELH would clear $1.3 billion in revenues in 2023 (which they did) and surpass $2.0 billion in revenues for 2024 (ie $2.05 billion to be exact). I thought CELH could expand net income margins to 14.5% (or better) in 2024 which means net income would be approximately $298 million this year which means non-GAAP EPS (not including cash from the Pepsi deal or their convertible preferred shares) would be approximately $1.29
Now that CELH has rallied +64% from those December lows, the stock is currently trading at 61x 2024 EPS (using my estimates) which means CELH is no longer the cheap stock that I said it was back in December.
CELH had a very solid Q4 (revenues up 95.2% YoY) and a phenomenal 2023 (revenues up 101.7% YoY) but all of that is now in the past, it should not matter to anyone because stocks trade on forward-looking fundamentals.
CELH did $0.79 of non-GAAP EPS in 2023 and my current estimates (this could change) are saying $1.29 for 2024 which implies 63.3% YoY non-GAAP growth which means CELH currently trading at 61x 2024 EPS (using my estimates) is fair/reasonable but I would not expect anymore multiple expansion from here (at least not in the near term).
However that doesn’t mean CELH can’t go up another 20-30% over the next 6-12 months as analysts raise their estimates, as institutional investors build/add to their positions, or as the stock squeezes higher (given the short interest is still hovering around ~30%).
There are still lots of reason to be bullish on CELH over the next 3-5 years but I can’t sit here today and say the stock is still undervalued because that would be untrue.
Back in 2020 when I first invested in CELH, the energy drink category was dominated by Red Bull and Monster with Bang showing significant potential to be the #3 player however alot has changed in the past few years. Bang got into serious legal trouble, was sued by Monster, lost two massive lawsuits and ultimately filed for bankruptcy which led to Pepsi dropping them as their distributor. All of the Bang chaos opened the door for CELH to land Pepsi as their distributor which also came with with a $550 million investment for an 8.5% stake in CELH (PEP is up +220% on those shares plus interest from the preferred stock).
Over the past 18 months the CELH and Pepsi partnership has worked out very well (perhaps flawlessly). Not only do they continue to expand their presence in retail and convenience (which CELH might have been able to do with their prior distributor Anheuser Busch) but Pepsi has really opened up the foodservice channel (now accounts for 12.5% of total revenues through Pepsi) which includes everything from bars and restaurants to airports, stadiums, hospitality, education, healthcare, corporate and so on.
Everyday my social media feeds are full of people posting pictures of CELH now available at their work, their school, their local coffee shop, their favorite sandwich store, etc — just like Red Bull and Monster are everywhere, over the next couple years you’re going to see CELH popping up in just as many places if not more. Any location that sells energy drinks only has so much space for the different brands and if CELH is selling faster than Monster and Red Bull then will continue to take more shelf/cooler space which is exactly what’s been happening the past 12-18 months and exactly what I expect to continue happening over the next 5+ years. Most large retailers do their resets in early Spring which means their corporate teams are looking at which products are selling the most/fastest and then allocating more space to them in the reset. I guarantee CELH is going to see more dedicated space with these upcoming Spring resets which means more displays, more endcaps, more SKUs, more shelf space, more cooler space, etc.
On top of that, Pepsi will continue moving more CELH sku’s into their main coolers as well as their energy coolers (which get shared with Rockstar and Starbucks) typically near the checkout areas and of course we’re still getting more CELH branded coolers. I believe CELH has already surpassed 20,000 branded coolers (I see them at CVS) and perhaps this number is heading towards 50,000+ over the next 3-5 years which means you’ll see CELH coolers everywhere you shop (similar to the slimmer Red Bull coolers that I’ve been looking at for 10+ years)
Last month CELH officially expanded into Canada but we don’t have any specific numbers yet. John Fieldly (CEO of Celsius) said the launch and expansion in Canada has exceeded their expectations but that’s all we know for now. When CELH reports Q1 earnings I suspect we’ll get more detailed financials for Canada which might give some insights into what is possible for the upcoming launches in the UK and Ireland later this year.
For Q4, international sales grew 68% YoY and for full year 2023 international sales grew 52% YoY (which means we’re seeing some acceleration before we even include Canada) but even with these growth numbers international is only 4% of total sales. Compare that number to Monster and Red Bull which do almost 50% of their sales outside of the US. For this reason, international presents a massive growth opportunity for CELH and it’s a big reason why I remain bullish on the stock over the next 5-10 years.
Here are my rough projections for international growth and sales over the 8-9 years, curious to see how this plays out and whether CELH can grow the brand (outside the US) with the help of Pepsi and other distributors anywhere close to as fast as they have grown in the US over the past few years. Keep in mind that CELH has grown revenues by triple digits for each of the past three years with total revenues up 25x since the start of 2018.
If CELH can grow international revenues faster than my model suggests, than the upside for the stock might be greater than my current forecasts.
Anytime you think about investing in a company like CELH you need to understand the TAM (total addressable market) and how the unit economics work for the energy drink category. If you do a quick google search, you will see the TAM for energy drinks was expected to cross $100 billion in 2023 for the first time ever. This market was expected to grow at 8.5% per year for the next 8-9 years but according to recent data the category is growing closer to 10.5% which means the TAM in 8-9 years might be bigger than previously forecasted. In my model below I’m using the more conservative 8.5% CAGR which means anything above that should be good for CELH and some of the other emerging brands who are also taking market share from Red Bull and Monster.
I say “unit economics” because the TAM is the total revenue number for energy drinks sold around the globe but the energy drink companies only see ~50% of that meaning a retailer might sell a can of Celsius or Red Bull for $2 but only $1 of that ends up in the brands pocket (these are just general numbers and it varies across brands and SKUs). FWIW, Red Bull sells approximately 10 billion cans per year.
Looking at my chart above, if the energy drink TAM did cross $100 billion in 2023 (hard to know the exact number because many of these companies are still private) and it grows at 8.5% per year through 2023 then we’re looking at a $211.8 billion TAM which means $105.9 billion (est) for the energy drink companies which means if CELH gets to $10+ billion of revenues by 2032 they’d have ~10% global market share versus ~2.5% today.
If by some miracle (it’s definitely feasible) the energy drink CAGR is 10% from 2024 through 2032 than the TAM goes from $211.8 billion to $239.7 billion which means ~10% global market share would push their revenues closer to $12 billion in 2032 (assuming the same 50% net-revenue margin for the brands).
Over the past 12 months CELH expanded their gross margins by 660 bps but that’s because we came out of the pandemic with elevated freight costs and raw material costs but those costs have been coming down which has been good for margins. I expect CELH to continue expanding margins but not by the same amount. I think CELH should be able to expand gross margins by ~100 bps per year for the next 5+ years, keep in mind that MNST peaked at 63.7% gross margins in 2016 but they might not include freight in that number so the real number when compared to CELH should be lower. With that said, I think CELH’s ceiling for gross margins is probably 54-55%.
If CELH is expanding gross margins by ~100 bps per year then they should be able to expand net income margins by at least 125-150 bps per year (at least for the next few years) then the net income margin expansion would likely slowdown to 75-100 bps per year which might get CELH to 24% net income margins by 2032 which is exactly where MNST is today (at scale).
Using these numbers, here is my current investment model going out to 2032 which shows another +250% upside from current prices but keep in mind that alot as to go right over the next 8-9 years starting with international expansion. There are dozens of things that could go wrong that would prohibit CELH from achieving the numbers in my model below or could impact the margins in a negative way which means less net income, small net income growth, low P/E multiple, etc.
In my model I’m using 232 million shares which is the approximate number of outstanding shares not including the preferred shares that Pepsi owns and will eventually convert at some point in the future. I’m guessing Pepsi owns an additional ~20 million shares (with $25 cost basis) which puts their stake at ~$1.6 billion.
As I mentioned above, most of my numbers are based around the energy drink TAM growing at 8.5% per year for the next 8-9 years, if the actual number is higher or lower than my CELH estimates will be impacted.
I intentionally left out any P/E multiple for 2024 and 2025 because it’s very hard to predict what the market is willing to pay in the short term for a stock, as we like to say “the pendulum always swings too far in both directions”
Since I still own a big chunk of CELH and plan on being a long-term investor, I’m much more interested in where I think CELH can go over the next 5-10 years. I’ve said before that I think CELH could be bigger than MNST someday but it won’t be happening anytime soon unless something goes really wrong at MNST.
MNST is already a $60+ billion company and expected to do $8 billion of revenues in 2024 with $1.83 of non-GAAP EPS which means MNST is currently trading at 32x 2024 non-GAAP with 16% EPS growth. This means MNST is trading with a 2.0x PEG ratio versus CELH at 1.0x PEG ratio — using this metric MNST is still twice as expensive as CELH however that can be a little misleading because MNST’s EPS growth is only expected to decline to 13% EPS growth next year whereas CELH’s EPS growth might decline more than that so CELH shouldn’t trade anywhere near a 2.0x PEG ratio right now because that would likely mean too much multiple compression over the next 12-18 months which I never want to be part of.
If you don’t already own CELH but still believe in the long term story you’ll need to figure out the right entry price, I can’t help you there.
Before wrapping up I will say this, I’m a little disappointed that we have not seen better product development from CELH over the past 12 months. They continue to crank out more flavors for their core 12 oz product (with 200 mg of caffeine) and they rebranded their HEAT product to Celsius Essentials (280 mg of caffeine) but we have not seen any progress on new products such as 10 oz can with less caffeine (perhaps 80-100 mg) or a true intra-workout product (no caffeine) or a hydration drink (ie Gatorade, Powerade, BodyArmor, Prime) or perhaps even a sugar free soda or seltzer product. I know that CELH is laser focused on their core products but I still want to see product expansion which means more SKUs in stores which means more revenues and more profits especially with Pepsi as the distributor and 20,000+ branded coolers (hopefully on the way to 50,000+ branded coolers).
To be honest, I don’t know if the lack of product innovation is because the CELH team has no interest at this time or are they getting pushback from Pepsi which has products in those other categories (they own Gatorade) — I don’t know the answer but my long-term outlook will be less bullish if we don’t see “some” product expansion beyond 12 oz and 16 oz cans.
Last thing I’ll say is how much I love this chart because it shows why CELH has been such an amazing performer for shareholders. Three years ago the analysts thought CELH would do $438 million of revenues in 2024 and now their estimates have increased to $1.86 billion (obviously I think they’ll do more). If you can find a few stocks where estimates go up this much then you’ll be rewarded many times over.
I’m already past 3,400+ words and I need to get on with my Saturday morning so I’ll end it there. If you want to learn more about CELH and what they’re doing/excited about, I would recommend reading through their earnings release [click here] and listening to the recent Q4 earnings webcast [click here]. You can also read the transcript for the earnings webcast [click here] which I like to do so I can take some notes.
If you have any questions about CELH it’s probably best to DM me on Twitter at http://twitter.com/jonahlupton
If you enjoyed this earnings writeup on CELH, please consider becoming a paid subscriber at https://growthstockdeepdives.substack.com/subscribe where you’ll get access to my current investment portfolio plus all my daily activity, daily notes/commentary and research including deep dives and earnings writeups like this one.
Best regards and enjoy your weekend,
~Jonah Lupton, CEO/CIO of Lupton Capital
You can follow me on Twitter at @JonahLupton
Disclaimer: The stocks mentioned in this newsletter are not intended to be construed as buy recommendations and should not be interpreted as investment advice. Many of the stocks mentioned in my newsletter have smaller market capitalizations and therefore can be more volatile and should be considered more risky. I encourage everyone to do their own research and due diligence before buying any stocks mentioned in my newsletters. Please manage your portfolio and position sizes in accordance with your own risk tolerance and investment objectives.