Performance Recap

Stock Performance

January 2024: The stock reached it’s peak driven by the PepsiCo partnership announcement.

Q2-Q3 2024: A combination of disappointing earnings results and market-wide selling pressure led Celsius to 52-week lows, reflecting a drop of nearly 30% from its highs.

Celsius has faced headwinds from both company-specific factors, such as slower-than-expected inventory turnover at PepsiCo, and broader market challenges, including tax-loss harvesting in the consumer discretionary sector.

Revenue and Earnings

Celsius's financials tell a story of rapid growth slowed down by operational challenges:

Q1 2024 Revenue: $355.7 million (+37% YoY) but fell short of analyst expectations.

Q3 2024 Revenue: $265.7 million, a sharp 31% decline YoY due to inventory recalibrations.

Net Income: Declined by 92% YoY in Q3 2024, highlighting a significant hit to profitability.

The revenue misses reflect challenges in matching production levels with true consumer demand, particularly as PepsiCo adjusts its inventory.

Here’s our report from January:

Key Developments

PepsiCo Partnership

Celsius’s collaboration with PepsiCo has been a double-edged sword. On one hand, it has provided access to a broad distribution network. On the other, PepsiCo’s inventory adjustments revealed weak sell-through rates, exposing vulnerabilities in demand forecasting.

Celsius recognizes revenue when products are sold to PepsiCo, not to end consumers. Thus, any slowdown in inventory turnover weighs heavily on reported revenue.

Vertical Integration

In November 2024, Celsius acquired Big Beverages Contract Manufacturing for $75 million, adding a 170,000-square-foot facility to its operations. This move should reduce reliance on third-party suppliers, improve cost efficiencies, and streamline the supply chain. However, it remains to be seen how quickly this acquisition will translate into margin improvements.

International Expansion

Celsius continues to expand aggressively, recently entering six new countries including the UK where it has made an appearance on some store shelves. International revenue grew 35% YoY in Q3 but still accounts for just 7% of total sales. This presents both an opportunity and a risk:

• Opportunity: Untapped markets in Europe and Asia promise long-term growth.

• Risk: Building brand loyalty outside North America is challenging, especially as international markets are less familiar with Celsius’s health-centric brand positioning.

Challenges and Risks

Branding & Reliance on Discounts

While Celsius has gained market share, its reliance on discounts raises concerns about the strength of its competitive moat. Discounts, though effective in the short term, could dilute brand equity over time. This contrasts with competitors like Monster Beverage (MNST), which have historically achieved growth without aggressive price cutting.

The energy drink industry is relatively low-barrier to entry and the type of growth we want to see in such a market is growth from a strong brand and desire, not discounts. Celsius does however have a strong social media presence.

Tax-Loss Harvesting

Recent stock price declines may also be fueled by tax-loss harvesting, as investors lock in losses before year-end. This could lead to a temporary suppression of Celsius’s stock price, with the potential for a rebound after the fiscal year closes.

Competitive Pressures

Celsius’s health-focused differentiation faces challenges from larger, well-established players such as Red Bull and Monster. Moreover, emerging weight-loss drugs could reduce demand for weight-loss beverages, posing a long-term risk to the industry. For now the company is growing sales faster than most competitors.

Conclusion

Celsius remains a growth story, but its near-term outlook is clouded by execution challenges and valuation concerns.

The company must prove it can sustain growth without over-reliance on discounts, navigate international markets successfully, and solidify its competitive moat.

While its long-term potential remains compelling, cautious optimism is warranted until Celsius demonstrates consistent profitability and margin improvements.

We’ll continue to monitor its developments, particularly as Q4 earnings approach. Investors should keep an eye on:

• Margin stabilization efforts.

• Updates on international market penetration.

• The impact of vertical integration on cost savings.

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Disclaimer

This analysis is for informational purposes only and does not constitute financial advice. It is not a recommendation to buy, hold, or sell any securities. Investors should conduct their research, seek professional advice, and consider their financial goals and risk tolerance before making investment decisions. The author and associated parties rely on publicly available information and assume no responsibility for the accuracy or completeness of the information provided and any losses that may occur from using this information. Past performance is not indicative of future results, and investment risks apply. The author may hold positions in discussed securities, which may change without notice.