You’d struggle to find many stocks that have produced a higher return over the past five years than Celsius Holdings‘ (CELH -0.09%) 3,000% gain. The Nasdaq Composite, by comparison, has climbed just 79% during the same period.
Key to Celsius’ meteoric rise has unsurprisingly been tremendous top-line growth as it continues rapidly stealing market share in its industry.
Looking ahead, I don’t think it’s out of the question that Celsius can continue its market outperformance. To be fair, shareholders probably shouldn’t expect similar returns to the past five years, but if you’ve got $1,000 ready to invest, Celsius stock might just be able to triple that by 2028.
Let’s take a closer look at this beverage business.
It’s almost impossible for a stock to skyrocket like Celsius has without the underlying business posting remarkable growth. In 2017, the company generated revenue of $36 million, a figure that soared 18-fold to total $654 million in 2022. That translates to a whopping 79% compound annual growth rate (CAGR).
The momentum is still strong. Celsius registered sales of $260 million during the first three months of 2023, a 95% year-over-year increase.
That’s impressive by itself, but it’s even more extraordinary when you consider the macroeconomic backdrop. Inflation is cooling, yes, but it’s still above the Federal Reserve’s target of 2%. Consumer confidence is still near its lowest levels in the last decade, and some economists still see the risk of a recession on the horizon.
Nonetheless, customer demand for these energy drinks is through the roof. Celsius’ profitability is also improving. The business saw net income explode 515% year over year in the latest quarter to $41 million. Seeing the bottom line grow faster than revenue is an encouraging sign, showing that the company is benefiting from operating leverage.
Besides energy drinks simply being one of the fastest-growing segments of the overall beverage market, a powerful tailwind, Celsius’ prospects could get a lift from its recent partnership with PepsiCo. Pepsi took a sizable stake in Celsius, and it’ll handle all distribution for the energy drink company. This can give Celsius greater exposure at a larger number of retail locations, which can obviously be a boon for sales.
Wall Street analysts are extremely optimistic. Consensus estimates call for revenue to increase at a CAGR of 27.5% between 2022 and 2027. While that gain pales in comparison to the past five years, it would still be impressive.
It’s not a certain outcome
It’s hard not to be bullish about this company, but investors should keep some risks in mind. Most notable is the intense competition in the industry. Customers have a seemingly unlimited number of choices when it comes to ready-to-drink beverages, meaning there is always the threat of a rival product gaining popularity quickly.
In addition, because barriers to entry in this industry are almost nonexistent, anyone can start their own energy drink business. This makes it almost impossible for Celsius to develop competitive advantages.
And the valuation is steep as the stock trades at a trailing price-to-earnings ratio of 379 as of this writing. Even taking into account its high-growth trajectory, the price-to-sales ratio of 14 is also a premium. The stock looks priced to perfection, so any negative headline, like an earnings report that misses expectations, could crush shares. There appears to be no margin of safety for investors.
Anything can happen
However, just because the valuation looks excessive right now doesn’t necessarily mean the stock is doomed to pull back. “Markets can remain irrational longer than you can remain solvent,” said economist John Maynard Keynes. Investor enthusiasm surrounding Celsius’ business can remain strong with optimism getting priced in even more. It’s up to you if this is the type of stock and strategy you want to pursue.
If history is any indication, Celsius shares have the potential to triple in price in the next five years. But investors should also understand this outcome is not set in stone. Even if you are very bullish on the business, it’s a good idea to make the stock a modest piece of a diversified portfolio.
On the other hand, if you’re a value investor, buying this stock is out of the question.