Celsius. The New Disruptor! Equity Research! Part 3/3.

Opportunities, Financial Analysis and Valuation

Welcome to 3rd and final part of this Celsius Deep Dive. I am Ray Myers and this is Global Equity Briefing!

Excellent stock performance doesn’t guarantee continued growth, however, it also doesn’t mean that the Celsius is done growing! Are there attractive opportunities that Celsius could pursue? Has stock growth been driven by great financials? What about valuation? These questions will be answered!

In Part 1 we discussed how the company came to be and what marketing strategies propelled Celsius to where it is today. Whilst, in Part 2 distribution strategy and the competitive environments were explored. I recommend one reads Part 1 and Part 2 before continuing with Part 3.

1. Opportunities

2. Financial Analysis

3. Valuation

4. Base Case

5. Bull Case

6. Conclusion

1. Opportunities

Now that we understand Celsius business model, let us look at the opportunities!

Growing Industry

For thousands of years and across many cultures people have been consuming caffeine, primarily through coffee and tea. Today both drinks remain extremely popular and are some of the most consumed products in the world. However, energy drinks have been steadily gaining ground and their popularity has exploded in the last 2 decades. In Part 2 of this report, we explored how Red Bull and Monster led the way. With both Red Bull and Monster still growing, can the industry handle another large player?

I believe the answer is clearly yes!

The sale of energy drinks is a massive global industry. Mordor Intelligence estimates the global turnover to reach $74B in 2024. Furthermore, the industry is expected to grow with a 5.83% CAGR, reaching $104B by 2030. With its unique market positioning, Celsius could capture an outsized share of this global growth.

It is way easier to enter a growing market than a mature market!

Celsius must use this opportunity to build their brand and entrench themselves in the minds and routines of customers! It is extremely hard and expensive to change people’s minds.

The domestic US market is huge, with estimated sales of $19B. Mordor Intelligence forecasts the market to grow with a 2.84% CAGR, slower than the global average. Nevertheless, Celsius has been able to grow significantly faster than the market, taking a market share from competitors. The fact Celsius has been able to achieve this in a quite mature and competitive market is a great indicator of its potential overseas!

Global Expansion

In 2023, only 5% of revenue was generated outside the US. There is ample potential for expansion!

Europe

Europe is a large and promising region full of people with high disposable incomes and a growing interest in fitness. Last year's sales there were only $49M.

Energy drink industry sales are estimated to be $22B, slightly above US sales of $19B. Moreover, with a 7.19% CAGR, the European market is growing faster than the global average. Celsius has taken steps to expand to Europe, and the company is poised to grow in the region. Let’s remember that Celsius has a 6% market share in the US.

If Celsius achieves a similar market penetration in Europe by 2030, it could generate $2B in sales!

Now of course, success is not guaranteed, and the company needs to execute well on its brand strategy and find the right product market fit.

Asia-Pacific

While Europe and North America are the larger and more mature markets. There is also potential in emerging markets.

Mordor Intelligence expects the APAC region to generate $31.4B in sales by 2030. Led by strong growth in China, India, and Japan. Sales last year were only $4.8M, so their market share is tiny. While there is still significant potential for expansion, the market dynamics and customer preferences are less similar as in Europe. Thus, the company is unlikely to achieve as strong of a market share.

Enlarged sub-niche

It is clear that the energy industry as a whole is projected to grow and Celsius should benefit. However, Celsius has achieved a feat that most energy drinks fail at. The company is attracting a significant number of women to the energy drink market. Not only that, but the company is also targeting the large and fast-growing fitness drink market.

Celsius is enlarging the “better-for-you” and women-oriented energy beverage sub-niche!

Celsius grew sales by over 100% last year, Red Bull and Monster grew as well. So whose market share is Celsius taking? I see some signs that Celsius growth could be driven by the company enlarging the market, not by stealing market share.

Celsius is attracting customers who previously weren’t consuming energy drinks, so if Celsius can create a product that appeals to diverse audiences, the company can unluck explosive growth!

By utilizing the same marketing concepts that drove Lululemon the company not only can capture a bigger slice of the pie, Celsius can make the whole pie bigger. A great product, beautifully packaged and precisely targeted is bound to find product market fit.

Fortune Business Insights estimates that the US sports drink market will grow with a 4.76% CAGR and reach around $10B by 2030. This category includes vitamin water, isotonic, hypotonic, and other sports drinks. If Celsius can convince people to trade their ordinary sports drinks for Celsius, the company could increase the total addressable market even more.

2. Financial Analysis

Sales Growth

Celsius ended 2023 with $1.3B in sales. This is a massive achievement, as only a few years ago sales were less than $100M.

In 2014 sales were a mere $13.6M, since then growth has been parabolic. Between 2021 and 2023 Celsius grew sales with 100%+ per year, for 3 years in a row.

In the last 5.25 years Celsius grew sales by 2,588%, a CAGR of 87%.

This massive sales growth was heavily driven by its partnership with Pepsi. As discussed in Part 2, 59.4% of the company’s sales go through the Pepsi distribution network, $782M.

It is unlikely that Celsius will continue growing as fast as it did, the company has become a victim of its own success and is simply too large now. In Q1 of 2024, Celsius quarterly revenues were $355.7M an increase of 36.8% Y/Y.

Most companies would love to “only” increase sales by 36.8%, however for Celsius, this signals that the company is exiting its hyper-growth phase. In the graph above we see how in Q4 2021 Celsius growth rate peaked at almost 200%. As companies mature, deceleration in growth is natural.

As mentioned in the previous chapters, so far the growth of Celsius has been driven by strong domestic sales in North America. 3% of sales originate in Europe, and 1% in other regions.

North America

In the last 5 years, North American sales grew with a CAGR of 99%. In Q1 2024 sales growth was 36.7%.

Sales in North America should continue increasing but at a slower rate. Pepsi will begin distribution in Canada, which should support continued sales increases. Domestically Celsius drinks are quite popular, however, they are not yet available as broadly as other beverages. There is enough room left for Celsius to increase market penetration and grow sales by 20%+ per year, for many years.

Europe

Sales in Europe were $43.7M in 2023. Europe is a massive opportunity for Celsius. I believe the recent Ferrari F1 sponsorship indicates this is a priority market for Celsius. In Q1 2024, sales were $14.1M, an increase of 63.2% Y/Y. Above the North American growth, and an acceleration compared to previous quarters!

Celsius has signed new agreements for distribution in UK, Ireland, France, and other countries. I expect that in the next few years, European sales will grow faster than North America.

Other Regions

The company earned $4.8M from the Asia-Pacific region and the revenue decreased last quarter and is below what it was 5 years ago. This is due to a change of strategy in China. However, now that Celsius has found a partner for New Zealand and Australia sales should reaccelerate again.  

Celsius strategy in South America and Africa is not clear. In the short term, it’s unlikely these markets will show huge growth, as the company focuses on executing in North America and Europe.

Profitability

In 2014 Celsius was a small and struggling beverage company with $14.6M in sales, operating losses of $1.5M, and net losses of $2M.

In Q1 2024 last 12-month operating profit was $304.6M, an increase of 20,207%, LTM net profit was $263.4M, 13,070% higher than in 2014. 2023 was a truly transformational year, the Pepsi partnership was firing on all cylinders and the company was reaching a massive scale. Operating profits grew by 271% Y/Y, while net profit increased by 221%.

Since 2020 revenue has grown with a CAGR of 108%, operating profit with 207%, and net profit with 187%!

Profit surge was not only driven by higher volumes but also by improving margins. As Celsius reaches higher economies of scale, expense growth is lower than revenue growth, resulting in margin improvements.

Gross margin stands at 49.6%, as a beverage company majority of cost of revenue is raw material costs and packaging, inventory costs before the manufacturing and shipping expenses. Most of these costs are paid to their manufacturing partner.

Operating margin is 21.5% and has improved significantly during the last few years. In 2022 operating margins were negative 23.8% as Celsius was in its hyper-growth phase and needed to pre-pay for various expenses. The company had to build out inventory, manufactured inventory is not included in the gross margin.

Net margin increased to 18.6%. As the company has a healthy cash reserve, it is earning substantial interest income, which compensates for taxes. This leads to the net margin being just a little bit smaller than the operating margin. During 2023 Celsius earned $26.6M in interest income.

Expenses

The cost of goods sold is the biggest expense for Celsius. However, the company incurs other expenses as well, marketing being primarily the next biggest expense.

As discussed in the marketing section of this report, Celsius is engaged in a brand-building exercise in the “better-for-you” sub-niche of the energy drink market. To protect the business from competitors, the company must entrench itself in the minds of consumers. Thus, marketing expenses are likely to increase significantly, especially as Celsius approaches peak scale. In the graph above we see that marketing expenses increased in absolute terms, but has remained relatively stable at 12% of revenue.

Operating Leverage

Operating leverage enables companies to have outsized profit growth even with smaller revenue growth. Enterprises with high operating leverage can create and sell an additional unit of output with limited or no increases in costs. Celsius as a beverage company doesn’t have high operating leverage. This is because a large share of its operating expenses are variable. Doesn’t matter if Celsius sells a million or 10 million cans, the company still needs to cover the costs of raw ingredients and inventory.

However, Celsius has improving operating leverage. From 2017 to 2021 sales increased by 768%, while operating profit increased by 49%, a degree of operating leverage of 0.06. Meaning that for every 1$ increase in revenue, operating profits increased by $0.06. However, from 2019 to 2023 sales increased by 1,655%, while operating income grew by 19,129%.  

A degree of operating leverage of 11.56, so for each 1$ in revenue, operating income increased by $11.56!

Balance Sheet and Cash Flow

Celsius has a very healthy balance sheet, and the company is quite profitable and slowly becoming a cash printing machine.

For twelve months ending with Q1 2024, Celsius FCF was $250M, 19.1% of revenue.

Celsius has only just begun its cash-printing journey!

Celsius has very little debt,  as of Q1 2024, their Net Cash position was $877.5M. Furthermore, a current ratio of 4.2 means the company has ample means at its disposal to cover its short-term liabilities.

Inventory management for FMCG companies is crucial. On one hand, empty shelves lead to lost revenue, on the other hand, overstocking causes forced discounts, higher warehousing expenses, and a possible cost nightmare. Celsius had $197.5M of inventory last quarter. Enough for 90.4 days of sales, on par with Monster and Coca-Cola, who had 98.9 and 95.6 days of supply respectively. As Celsius grows internationally, this becomes an important metric to track. Any holes in the growth story will likely lead to elevated inventory.

As mentioned in Part 1, Celsius uses 3rd party manufacturing partners. This enables the company to operate a CAPEX-light business. In 2023 Celsius spent $17.4M on Capex, just 1.38% of revenue.

So far the company has had supreme returns on invested capital, 44.1% in Q1 2024. ROE was 25.5% and ROA 17.9%. Celsius is showing high capital efficiency and demonstrating the power of its business model. As the company grows, I wouldn’t be surprised if Celsius deploys some of these returns toward acquisitions.

3. Valuation

Celsius has had quite a run. The stock is up over 5,000% and the company is valued at $17B. Since I published Part 1, market cap has decreased by $2B, as investor concerns about slowing growth intensify.

As a result of this run, valuation has become quite demanding. Currently, the company is trading for a trailing P/E of 80 and an FCF Yield of 1.6%.

Celsius is priced for significant growth in the future!

The current price implies massive growth after 2026, as valuation based on 2026 results is expensive as well, P/FCF of 44 and P/E of 37. To see if there is still some energy left in the can, I have prepared a Base Case and a Bull Case model. A few factors are driving the valuation.

New Products

Celsius could create new products to capitalize on their brand and expand its TAM. As of today, it is just speculation and a thought exercise. It is unknown if Celsius will decide to release such products, thus estimating sales volumes and margins for these non-existing products would be a futile endeavor.

For this reason, I have not included sales of new products in my revenue estimate. Furthermore, I have also not included sales of their currently sold smaller business, such as powders and protein bars. If Celsius does release new merchandise or sales of their existing products accelerate, it would be a bonus point.

Margins

Celsius only recently reached scale. As the company grows, economies of scale will increase negotiating power, enabling lower prices from suppliers. Larger volumes will create higher efficiencies in production and supply chain. Higher marketing buys drive customer engagement, increasing pricing power and again helping margins!

Margin expansion has just begun!

Looking at the margins of Coca-Cola and Monster we see that there is still space for Celsius to lower the gap. It’s doubtful Celsius can match the margins of Coca-Cola, one of the largest and most known brands in the world. However, they could reach the levels of Monster. In both valuation models, I assume that the Gross Margin will be 52%. Due to the nature of this business, Celsius is likely to keep spending on marketing, so I left them at 13% of revenue for the Base Case. However, other expenses should grow slower than revenue, leading to a Net Margin of 23%.

Celsius ability to control costs will be crucial. When a company matures it needs to stop planning for explosive growth and be mindful of its expenses. If Celsius overestimates their growth, the company could build oversized, expensive, and margin-destructive operations.

Market Share

Energy drink segment is very competitive and each region’s market dynamics are different. For this reason, I estimate revenue for 4 regions separately.

I used Mordor Intelligence forecasts of 2030 energy drink market sizes for the US, Europe, APAC, and the rest of the world. The next step was to estimate 2030 Celsius potential market share for each region.

US is the home market of Celsius. The company has shown steady growth and its partnership with Pepsi is enabling Celsius to reach more people than ever. Furthermore, as discussed earlier in this report, Celsius is expanding the market, attracting women and fitness enthusiasts who previously were not consuming energy drinks. For this reason, I find it likely Celsius entrenches itself as a solid 3^rd most popular energy drink brand.

In Europe Celsius doesn’t have a partner such as Pepsi. This might change in the future, but it seems Celsius has chosen a strategy of partnering with smaller regional companies, rather than a single large partner. It is unlikely that Celsius will achieve the same growth and market share levels as it did in the US. However, market dynamics and customer preferences in Europe are the most similar to the US, allowing the company to attain a strong market position. Culture and customer preferences are quite different in China, India, and Africa, the emerging energy drink growth markets. Thus, in APAC and the rest of the world Celsius is unlikely to reach such strong market share levels as in US and Europe.

4. Base Case

By 2030

US Market Share of 15.5%, Europe 4.93%

APAC 1.63%, Rest of the World 1.35%

Gross Margin of 52%

Tax of 25%

23% Net Margin

1.5% Yearly Dilution

In the base case scenario, Celsius uses its strong distribution network and grows its US market share to 15.5% by 2030. The majority of this growth will happen in the next few years, after which market share gains should slow down. Due to various aspects mentioned earlier in the report, market share in Europe is much lower, at around 5%, whilst market shares in APAC and the rest of the world are in mid-single digit %.

Assuming Mordor Intelligence 2030 market size forecasts come to fruition and Celsius achieves these market share levels. The company would have $3.5B in sales in the US, $1.7B in Europe, $0.5B in APAC, and $0.2B in the rest of the world, achieving a combined 2030 sales of $5.9B! Higher cost efficiencies would enable Celsius to reach a 23% Net Margin, leading to a $1.3B Net Profit. If Celsius would be trading for 30 times earnings, the market cap would be $39.7B.

If dilution levels don’t exceed 1.5%, price per share would be $154.29, an 111% upside from today’s levels of $73, a CAGR of 12.2%!

A P/E of 30 would imply that investors expect further growth, however, if the market doesn’t expect the growth to continue, a lower P/E might be appropriate.

15 times earnings multiple would result in a share price of $77.14, only 5.7% above today’s levels!

5. Bull Case

By 2030

US Market Share of 18%, Europe 8.07%

APAC 3.76%, Rest of the World 4.89%

Gross Margin of 52%

Tax of 25%

24% Net Margin

1.5% Yearly Dilution

The key difference between the Bull Case and the Base Case Model is the market share assumption. Market share in Europe increases significantly to 8.07% compared to the 4.93% in Base Case. APAC market share doubles to 3.76%, whilst the rest of the world triples to 4.89%. The US market share increases from 15.5% to 18%.

Celsius marketing is more effective than in the Base Case empowering the company to reach similar growth levels as they had in the US. Execution goes without hiccups and the company finds great manufacturing and distribution partners that allow Celsius to reach scale.

However, as the US market is very competitive, the market share gains compared to the Base Case are not as large as for other regions. Thus, in my mind, the key factor determining whether Celsius can achieve growth larger than in the Base Case is how well the company executes internationally!

In this scenario sales would reach $4B in the US, $2.7B in Europe, $1.2B in APAC, and $0.8B in the rest of the world, achieving a combined 2030 sales of $8.7B! Slightly higher cost efficiency allows Celsius to reach a 24% Net Margin, leading to a $2B Net Profit. If Celsius would be trading for 30 times earnings, the market cap would be $62.1B.

In the Bull Case, assuming 1.5% dilution price per share would reach $241.23, a 230% upside from today’s price of $73, a CAGR of 20.2%

However, if the growth story past 2030 is not that convincing and market deems a P/E of 15 appropriate, market cap would be $31B.

With a price per share of $120, Celsius would create a 65.2% upside, a CAGR of 8%!

6. Conclusion

Celsius has achieved something special. The company turned from an irrelevant and small beverage company with a few million in sales into a multi-billion enterprise.

Celsius is on a path to possibly becoming a global behemoth!

The company has found a great niche and is expanding the entire market by attracting a cohort previously neglected by energy drink brands, women. With its unique product design, marketing positioning and message, the company is blurring the line between various drink categories, possibly unlocking the secret to explosive growth.

Can this be replicated across the globe?

The path won’t be easy. Competitors will not stand still, they will go after Celsius customers with similar products. Furthermore, with massive global scale complexity will undoubtedly increase. Higher complexity can cause delays in decision-making or rushed costly mistakes.

Celsius is financially sound, however, the company is trading at a premium valuation! Both the Base Case and the Bull Case models show that there is still an upside in this company, however, the upside is dependent on the company's success overseas.

Ultimately if Celsius successfully translates its brand message, and finds great manufacturing and distribution partners, the stock will do well. If the company fails at these tasks, the stock will stagnate!

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