#57 Celsius Holdings

A critical view

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I’ve seen a lot of bullish posts about Celsius Holdings recently, and while I understand the optimism—Celsius has certainly achieved impressive milestones over the past few years—the company’s growth story is starting to show some cracks. With the stock down 43% year-to-date, I wanted to dig deeper to understand what’s behind the decline. Despite the potential opportunity many investors see, there are some important risks and uncertainties that shouldn't be overlooked. So, let's dive in and take a closer look at what’s going on.

About Celsius Holdings CELH 0.00%↑

Celsius Holdings started as an underdog in the energy drink market, focusing on fitness and wellness at a time when sugary, high-caffeine drinks dominated the scene. It positioned itself as a healthier option with zero sugar and natural ingredients, quickly gaining traction among health-conscious consumers. Over the past decade, Celsius has seen significant growth, aided by a strategic partnership with PepsiCo that boosted its distribution. Its market share has climbed to 12% in the U.S., and the company is now expanding into international markets, seeking to challenge industry giants like Monster and Red Bull.

Celsius’s branding and product focus on a wellness-oriented lifestyle helped it stand apart from competitors, appealing to a broader demographic of both men and women. The company's growth trajectory has been impressive, bolstered by its continued expansion into global markets and strategic partnerships that support its scalability.

Over the past twelve months, Celsius generated approximately $1.5 billion in revenue, with an operating income of around $335 million and a net income of $291 million, translating to an earnings per share (EPS) of $1.04. The company is currently valued at $7.9 billion and trades at a forward price-to-earnings (P/E) ratio of about 46x.

The bearish side

Celsius Holdings: Growing Competitive Pressure Poses High Risk for Investors

Celsius Holdings has enjoyed impressive growth over the past several years, emerging as a leader in the fast-growing energy drink market, particularly within the sugar-free segment. However, the company now faces intensifying competitive pressure that could slow its growth trajectory and negatively impact profitability. This competitive landscape represents a high risk for investors, as it threatens the company's ability to sustain its current pace of expansion while maintaining healthy margins.

Increasing Competition in a Crowded Market

The energy drink market, traditionally dominated by brands like Red Bull and Monster, has become increasingly competitive, particularly within the sugar-free segment where Celsius has positioned itself as a key player. Red Bull, Monster, and other established brands are aggressively launching new products and expanding their own offerings to capture more of the sugar-free consumer base. As Celsius acknowledged in its Q2 2024 earnings call, these competitors are not only taking market share, but also applying promotional pricing strategies that are putting pressure on Celsius' growth in certain channels.

This heightened competition could significantly dilute Celsius’ market share, as seen by recent sequential declines, despite its strong year-over-year growth. If competitors continue to ramp up their own innovations and aggressive pricing, Celsius may struggle to maintain the double-digit growth that has characterized its recent performance.

Macroeconomic Headwinds Add to the Challenge

Celsius is also operating in an environment where macroeconomic headwinds are squeezing consumer spending. Higher inflation and interest rates are causing consumers to become more price-sensitive, which has shifted their purchasing habits toward bulk buying (e.g., from Amazon or clubs) at the expense of smaller purchases in convenience stores. This dynamic is compounded by the increased promotional activity from competitors, making it even harder for Celsius to maintain its premium pricing strategy without losing consumers.

The discrepancy between sales growth and market share declines highlights a potential underlying problem: although Celsius is growing faster than the overall category, it is losing ground to competitors who are capturing share through aggressive promotions. This situation could worsen in the coming quarters, especially if macroeconomic pressures persist, limiting consumers' willingness to pay a premium for energy drinks.

Profitability at Risk

The combination of intensifying competition and rising input costs also puts Celsius’ profitability at risk. While the company has been able to increase gross margins due to lower freight and raw material costs, further price increases may not be feasible in the current competitive environment. Competitors are raising prices, but Celsius must tread carefully, as further increases could alienate price-sensitive consumers, especially given the company’s reliance on premium pricing.

Moreover, the company is significantly expanding its sales force and marketing efforts to fend off competitors and drive growth. While these investments are necessary, they also put downward pressure on margins. Increased spending on marketing and promotions may be essential to maintain market share in the short term, but this will likely erode profitability if it continues at current levels without a corresponding boost in sales.

Long-Term Growth Projections in Jeopardy

Although Celsius has exciting innovation plans for 2025, including new flavors and international expansion, these initiatives carry risks. The energy drink market is highly saturated, and new product launches do not guarantee immediate success, especially when larger competitors can quickly replicate or out-market Celsius’ innovations. Additionally, while international expansion presents an opportunity for growth, penetrating new markets comes with challenges related to distribution, marketing, and consumer adoption. Any missteps could delay or limit the expected returns from these ventures.

Is Celsius the new Monster?

Celsius Holdings has drawn comparisons to Monster Beverage Corporation, given both companies' success in the energy drink market. However, Celsius is not the new Monster for several critical reasons, despite its rapid growth and popularity. The two companies differ significantly in terms of their market position, business model, and the challenges they face. These distinctions are important for investors considering whether Celsius can replicate Monster’s long-term success.

Different Market Dynamics

Monster Beverage became a market leader by riding the wave of the traditional sugar-heavy energy drink category, which, at the time, was a relatively untapped market. Monster capitalized on a broader consumer base, appealing to a diverse range of demographics, from gamers to extreme sports enthusiasts. This early advantage allowed Monster to secure a dominant market position with strong brand loyalty and entrenched distribution channels.

In contrast, Celsius operates in a more competitive and saturated energy drink market. While Celsius has found its niche within the health-conscious, sugar-free segment, this is only a subset of the overall energy drink market. Moreover, this segment is increasingly crowded, with major players like Monster and Red Bull aggressively expanding their sugar-free offerings to capture Celsius' market share. The intense competition Celsius faces today is significantly greater than what Monster dealt with during its formative years.

Brand and Audience Appeal

Monster has built a broad brand appeal that resonates across multiple consumer segments, from fitness enthusiasts to casual energy drink consumers. Its long-term partnerships with major sporting events and pop culture figures have helped sustain brand recognition over time. Monster is now seen as a staple in the energy drink world, catering to consumers who seek both energy and indulgence.

Celsius, on the other hand, is strongly associated with health and fitness, positioning itself as a drink that supports an active lifestyle. While this strategy has resonated with a niche audience, it inherently limits the brand’s broader appeal. Celsius may struggle to break into the mainstream in the way that Monster did, as it is not viewed as an “all-purpose” energy drink. Its current image as a functional, health-oriented product could restrict its ability to capture the full range of energy drink consumers.

Dependency on Niche Market Growth

Celsius is heavily reliant on the sugar-free and health-conscious consumer market, which is a growing but limited segment. Although health trends are gaining popularity, the traditional energy drink consumer base still values taste, indulgence, and the immediate energy boost that comes with sugar-laden drinks. Monster thrives in this space and continues to dominate the market because it caters to both traditional and health-conscious consumers.

Celsius’ reliance on this more health-focused, niche market means that its potential for scaling may be more limited compared to Monster. If growth in the health and wellness space slows, Celsius may find it difficult to sustain the same momentum. Monster, by contrast, has diversified its product range, offering a variety of energy drinks that cater to different tastes and dietary preferences, allowing it to weather changes in consumer trends more effectively.

Competitive Pressure and Market Saturation

Celsius faces much fiercer competition than Monster did during its rise. Monster and Red Bull now dominate the energy drink market, and both have responded aggressively to the rise of sugar-free trends. In fact, Monster’s own sugar-free options are expanding rapidly and are directly competing with Celsius in retail channels. Other competitors, like Bang Energy and even traditional beverage companies like PepsiCo and Coca-Cola, are also entering the space with products that target the same health-conscious consumers Celsius has been relying on.

Celsius is also facing price competition, with major players running aggressive promotions that make it harder for Celsius to maintain its premium pricing strategy. This intense competitive landscape poses a risk to Celsius’ growth, limiting its ability to capture more market share. By contrast, Monster, having established itself earlier in the market with less competition, could scale more easily and sustain its dominance over time.

International Expansion Challenges

Monster is a global brand with well-established distribution channels in major international markets. Its early partnerships with Coca-Cola facilitated rapid international growth, making Monster a household name worldwide.

Celsius, while expanding internationally, is still in the early stages of its global strategy. The company has entered markets like Canada and the UK, but it has yet to fully establish itself on a global scale. International expansion is costly and requires navigating different regulatory environments, consumer preferences, and distribution challenges. This process is slower and riskier than the domestic growth that drove Monster’s success in its early years.

Celsius is Not the Next Monster

While Celsius is a fast-growing company with a strong brand in the health-conscious segment, it lacks the broad appeal, established infrastructure, and market dominance that have made Monster a long-term leader in the energy drink space. The competitive landscape, narrower market focus, and challenges associated with scaling internationally make it unlikely that Celsius can replicate Monster’s trajectory. For investors, these factors highlight the risks of viewing Celsius as the "next Monster" and underscore the potential limitations to its long-term growth and profitability.

Dependency on Pepsi

Celsius Holdings’ strong dependency on PepsiCo for distribution poses several potential risks for the company’s growth, profitability, and long-term stability. In Q2 2024 nearly 53% of sales come from PepsiCo. While the partnership has been instrumental in expanding Celsius’ market reach, it also introduces vulnerabilities that could affect the company in significant ways if any disruptions or changes occur in the relationship.

Loss of Strategic Autonomy

By relying heavily on PepsiCo for distribution, Celsius sacrifices a degree of control over its operations. PepsiCo is a massive corporation with its own strategic goals, priorities, and product lines. If PepsiCo’s objectives or market strategies change, Celsius might find itself misaligned or deprioritized in favor of PepsiCo’s own products or other brands in its portfolio. For example, if PepsiCo focuses on promoting its own energy drink brands (like Rockstar), Celsius might see less attention or fewer resources dedicated to its distribution.

This lack of control can also make it difficult for Celsius to pivot quickly if market conditions change or if new opportunities arise, since it would need to coordinate with PepsiCo, which may not share the same urgency or business goals.

Dependency on PepsiCo’s Operational Performance

Celsius’ success is now tied closely to the operational performance of PepsiCo. Any disruptions in PepsiCo’s distribution network—whether due to logistics issues, supply chain bottlenecks, labor strikes, or management decisions—could negatively affect Celsius’ ability to get its products on store shelves. This level of dependency means that even operational challenges completely outside of Celsius’ control could have a direct impact on its sales, market penetration, and growth.

If PepsiCo faces internal challenges, such as bottlenecks in its distribution system or strikes in key markets, Celsius could see delays in product availability, potentially leading to lost revenue opportunities and damaged relationships with retailers and consumers.

Negotiation Power Imbalance

Given PepsiCo's size and power as a global corporation, it holds a significant amount of leverage in the relationship with Celsius. This imbalance can put Celsius at a disadvantage in negotiations over terms like distribution fees, profit-sharing agreements, or marketing commitments. If PepsiCo decides to increase its fees or make less favorable terms for Celsius, it could eat into Celsius’ profit margins, impacting the company's overall profitability.

Celsius may find itself in a weaker position during contract renewals or in situations where it needs to negotiate favorable terms for expanding into new markets or gaining additional shelf space.

Risk of Contract Termination or Changes

A major risk in any dependency on a single partner is the possibility of contract termination or unfavorable changes to the partnership terms. If PepsiCo were to terminate or alter the distribution agreement, it could create a significant disruption for Celsius. The company would likely struggle to replace PepsiCo’s vast distribution network quickly, leading to possible loss of market share, decreased availability of its products, and potentially slower growth.

Moreover, while PepsiCo has a vested interest in the success of its distribution partners, there is always the risk that PepsiCo may choose to prioritize other brands or even acquire a competing energy drink company, which could diminish its focus on Celsius.

PepsiCo’s Competing Interests

PepsiCo is also a major player in the beverage market with its own brands, including Rockstar Energy, a direct competitor to Celsius. While the distribution partnership currently benefits both companies, there is always a risk that PepsiCo may shift resources towards promoting its own energy drink brands over time, especially if Rockstar or other PepsiCo products start to gain more traction. This could result in less promotional support or less favorable distribution efforts for Celsius.

PepsiCo’s control over critical elements of the distribution process, including shelf space and in-store marketing, gives it the ability to influence consumer exposure to Celsius products versus its own offerings. If PepsiCo decides to prioritize its own energy drinks, Celsius could lose valuable shelf space and promotional opportunities.

A Double-Edged Sword

While the PepsiCo partnership has undoubtedly helped Celsius scale its operations and enter new markets, the strong dependency on a single distribution partner presents significant risks. If the relationship with PepsiCo were to change or falter, Celsius could face major disruptions that would affect its market growth, profitability, and strategic flexibility. For investors, this dependency should be viewed as a double-edged sword—on the one hand, it offers the advantage of tapping into PepsiCo’s powerful distribution capabilities, but on the other, it introduces substantial risks that could threaten Celsius’ long-term sustainability and profitability.

The ignored Risks at Celsius: Internal Control Issues Investors Shouldn't Ignore

Celsius Holdings has been one of the most exciting growth stories in the energy drink market, attracting attention from both consumers and investors alike. However, behind its rapid rise to prominence lies a less glamorous reality: serious internal control weaknesses that could pose significant risks for the company and its shareholders. While Celsius continues to deliver strong financial results, its most recent disclosures highlight material weaknesses in its internal control over financial reporting, which should give investors pause.

What Are Internal Controls, and Why Do They Matter?

Internal controls are the backbone of any company’s financial reporting process. They ensure that transactions are recorded accurately, assets are properly accounted for, and financial statements are free of material misstatements. For investors, these controls provide assurance that the numbers presented in quarterly and annual reports are reliable.

When a company reports a material weakness in its internal controls, it essentially means there’s a significant deficiency that could lead to errors in its financial statements. This is a serious issue because it raises the possibility that reported earnings, revenue, or other key metrics could be incorrect, potentially leading to misleading financials or even restatements.

Celsius’ Material Weaknesses: A Closer Look

In its 2023 year-end financial report, Celsius disclosed that its internal controls were not effective due to material weaknesses in three critical areas:

1. Revenue Recognition: The process by which the company records and reports sales revenue.

2. Promotional Allowances: Accounting for discounts, rebates, and promotions offered to customers.

3. Inventory Accounting: Managing and tracking inventory, which directly affects the cost of goods sold and profitability.

These areas are essential to any business, but particularly for a company like Celsius, where sales and promotions play a huge role in driving growth and market share. Inaccurate accounting in these areas could lead to misstatements that misrepresent the company’s actual performance.

What Does This Mean for Investors?

1. Risk of Financial Misstatements: The presence of material weaknesses means that there is a higher risk that Celsius’ financial statements could contain errors. While management has stated that it believes the company’s financials fairly represent its performance, the fact that key controls were not functioning properly raises concerns about the accuracy of those numbers.

2. Regulatory Scrutiny and Audit Concerns: Celsius’ independent auditor, Ernst & Young, issued an adverse report on the effectiveness of the company’s internal controls. This is a clear signal to investors that there are substantial issues with how the company tracks and reports its finances. An adverse report from a major audit firm can lead to increased regulatory scrutiny and may also result in higher costs as the company works to correct these problems.

3. Delayed or Inaccurate Financial Information: Material weaknesses in revenue recognition, promotional allowances, and inventory accounting mean there’s a possibility of delays or inaccuracies in future financial reporting. If these weaknesses aren’t fully addressed, Celsius could face situations where revenue is overstated, costs are understated, or key financial metrics are misrepresented—any of which could erode investor trust.

What Is Celsius Doing to Fix the Problem?

Celsius has acknowledged the seriousness of these weaknesses and has taken steps to address them. The company has remediated some of the issues that existed in 2022, particularly in its IT general controls and the design of business process controls. However, the issues related to revenue recognition, promotional allowances, and inventory accounting persist and will take more time to fully resolve.

The company has outlined a remediation plan, which includes redesigning its internal processes and placing greater emphasis on timely review and oversight. However, until these controls are tested and proven effective over a sustained period, the material weaknesses will remain a concern for investors.

Bottom Line: A Risk Investors Can’t Ignore

Celsius has a lot going for it—strong brand recognition, a loyal consumer base, and a strategic partnership with PepsiCo that has expanded its market presence. But the internal control weaknesses reported in its financial statements highlight a significant risk that should not be overlooked. Material weaknesses in financial reporting can lead to misstatements, regulatory penalties, and lost investor confidence, all of which could hinder the company’s long-term success.

Celsius Stock Valuation

Celsius stock is down around 43% year-to-date, and many investors see this as an opportunity to buy into a promising company. However, caution is warranted, in my opinion. Analysts project a compound annual growth rate (CAGR) for sales of about 18% and an EBIT CAGR of around 23% through 2028 (Source: TIKR). While the forward TEV/EBIT ratio is currently about 30.4x—lower than its historical average—revenue growth is slowing significantly. Between 2018 and 2023, revenue growth averaged an impressive 90%, but now the pace has decelerated.

Based on my analysis and the risks discussed earlier, I believe there are considerable uncertainties in hitting these growth projections. Therefore, it's still difficult to determine if the stock is truly "cheap" at this point. While I won't make a definitive call, I personally won’t be investing in Celsius stock at this time.

Conclusion

Celsius Holdings has undoubtedly made impressive strides in the energy drink market, positioning itself as a key player in the health-conscious, sugar-free segment. Its partnership with PepsiCo has expanded its reach, and its growth trajectory—both in the U.S. and internationally—suggests it has potential to become a strong contender against industry giants like Monster and Red Bull. However, the company’s intensifying competitive pressures, dependence on PepsiCo, and material weaknesses in internal controls pose serious risks for investors.

While the company’s innovation pipeline and expansion plans are exciting, these challenges raise concerns about long-term profitability, market share erosion, and financial reporting accuracy. Investors should remain cautious and consider these risks when evaluating the future potential of Celsius. The company must prove it can manage both operational complexity and competitive threats while ensuring robust internal processes to sustain its growth. Until these issues are fully addressed, Celsius' story remains one of both opportunity and significant risk. As said before I will stay at the sideline.

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Disclaimer: The information provided in this publication is for educational and informational purposes only and does not constitute financial advice. The content is solely reflective of my personal views and opinions based on my research and is not intended to be used as a basis for investment decisions. While every effort is made to ensure that the information is accurate and up-to-date, the writer makes no representations as to the accuracy, completeness, suitability, or validity of any information in this post and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All readers are advised to conduct their own independent research or consult a professional financial advisor before making any investment decisions. The author is not invested in the mentioned stock.