Celsius Stock Has Soared 206%. Is It a Buy or a Sell?

Key Morningstar Metrics for Celsius Holdings

• Fair Value Estimate: $35.00
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: None
• Fair Value Uncertainty: Very High

While many investors have been focused on artificial intelligence and technology stocks, one of the biggest rallies this year has come from an unlikely corner of the market: a health and fitness beverage company. Shares of Celsius Holdings CELH have already risen 66.8% in 2024, with a 42.7% gain in the last month alone after the company reported stronger-than-expected earnings and sales in February. This brings the stock’s rally to 205.9% over the last 12 months, and it now goes for around $91 per share. Its previous peak was around $68 in September of 2023.

Celsius “has consistently outpaced FactSet consensus estimates as it has been successful in executing its core initiatives,” says Ari Felhandler, associate equity analyst for Morningstar. That success can be seen in big gains in the company’s market share, which has risen to 8.7% of US volume in 2023 from 1.7% in 2021. Those core initiatives include distribution gains in multiple channels, investment in the brand, reformations in the core beverage lines, branded cooler placements, altering pack sizes to broaden their reach and appeal, progress in detailing its strategy in international markets, and continued share gains.

In the background are hopes that Celsius will continue to build on its 2022 distribution agreement with PepsiCo PEP and capitalize on its health-centric brand positioning. “Investors have very high hopes for the brand to continue to execute in these key areas as they see the fruits of the PepsiCo deal come to fruition, backed by a product that bodes well with consumer health trends,” says Felhandler.

However, he now sees Celsius as significantly overvalued, trading at a 162% premium to his fair value estimate of $35: “Despite the firm’s strong position in the reduced-sugar energy drink niche and compelling near-term growth narrative through its PepsiCo agreement, we believe the market overvalues its ability to seamlessly wrestle market share from entrenched competitors like Monster MNST and Red Bull and defend against new entrants in the longer term.”

In addition, there’s the prospect of increased competition, which could slow Celsius’ growth prospects. “Fundamentally, Celsius’ strategy seems replicable, and we anticipate that resource-rich rivals are likely to ramp up innovation/marketing (these firms boast outsized budgets relative to Celsius) and intensify price competition to bolster their better-for-you offerings, challenging the firm’s narrow focus on the segment, longer term,” Felhandler explains.

The following are highlights of Dan Su and Ari Felhandler’s current outlook for Celsius and its stock. The full report and more of their coverage of Celsius are available here.

Fair Value Estimate for Celsius

With its 1-star rating, we believe Celsius’ stock is significantly overvalued compared with our long-term fair value estimate.

We’ve raised our fair value estimate to $35 per share from $33 to account for greater revenue growth throughout our forecast due to strong execution and the time value benefit, more than offsetting our outlook for higher advertising expenses. Our estimate implies a 30 times multiple against our adjusted 2024 earnings estimate and a 2024 enterprise value/adjusted EBITDA multiple of 20 times.

Economic Moat Rating

We don’t believe Celsius has carved out a durable competitive edge. Despite impressive volume share gains in the energy drink category in North America over the past few years, the firm is far from a market leader (8.5% share in the region), and we are skeptical that Celsius’ recent success can translate into an intangible asset or cost-based advantage, even with its long-term distribution agreement with PepsiCo.

We surmise that the narrowly focused energy drink brand faces an uphill battle in taking share from competitively advantaged incumbents like Monster and Red Bull, which boast strong brand equity and distribution prowess. In addition, smaller entrants continue to encroach on Celsius by offering new flavor profiles and functional benefits, limiting the firm’s ability to expand its scale or command pricing power. We anticipate that larger, better-resourced rivals will effectively defend their leads, limiting Celsius’ margin and returns.

Financial Strength

We believe Celsius is in solid financial shape. At the end of December 2023, it had $756 million in cash and equivalents and was free of any outstanding debt. Celsius boasts robust cash reserves thanks to PepsiCo’s $550 million capital injection in return for an 8.5% equity stake in 2022. We view it unlikely that the company will need to resort to the debt markets for liquidity unless it makes a major acquisition, which we view as improbable in the near to medium term. Its capital structure should continue to be predominantly skewed toward equity.

We model Celsius to use excess cash to repurchase shares in 2026, averaging 4% of its total shares outstanding annually. We speculate that this cash may be deployed for strategic acquisitions aimed at diversifying its narrowly focused product portfolio, which could potentially include expanding into growing categories like the better-for-you snacking aisle over a longer horizon.

Risk and Uncertainty

We assign a Very High Uncertainty Rating to Celsius, consistent with our quantitative framework. The firm operates in the competitive energy drink category, which boasts strong brand loyalty, while e-commerce, social media, and evolving consumer preferences provide a runway for smaller challengers to emerge.

To defend market share, we posit that preemptive leaders Monster and Red Bull will leverage their scale benefits to fuel innovation and competitively price products to challenge Celsius’ appeal. We see this as the largest threat to Celsius’ growth and profit trajectory, as necessary brand investments to drive trial and repeat purchases may hinder distribution benefits.

Further, it isn’t a foregone conclusion that Celsius will be successful in its international pursuits, and such ambitions could distract management from ensuring its standing on its home turf persists.

Lastly, Celsius confronts risks in its brand messaging and influencer partnerships, as any misalignment with its brand values and image can lead to reputational damage with consumers and partners. That said, we anticipate that environmental, social, and governance risks will have a limited material impact on Celsius in the long term.

CELH Bulls Say

• Celsius’ better-for-you, fitness-oriented product portfolio complements consumer preference for wellness-oriented offerings, propelling outsize growth prospects relative to the overall beverage and energy drink category.
• Celsius should continue to expand its distribution points through the PepsiCo network, facilitating growth through entry into new markets and channel penetration.
• Investments in branded cooler placements should enhance Celsius’ in-store visibility, while continued product investments could bolster brand loyalty.

CELH Bears Say

• Due to the category’s capacity for innovation, Celsius must spend more on marketing and R&D to remain competitive, which could cap its profit prospects.
• Success in international markets may be difficult due to differences in taste preferences, Monster’s market dominance, and PepsiCo’s less-robust beverage distribution prowess relative to Coca-Cola KO.
• Regulatory scrutiny in the United States and Europe might dimmish the firm’s brand, especially with its narrow category focus.