Celsius stock finally cools off...analysts warm up to it

Key Points

• Cautious Bank of America commentary sparked a selloff that has put CELH more than 25% below its December 2023 record high - but other analysts' ratings suggest the drop is an opportunity.
• Since the company has a limited overseas presence and its Pepsi tie-up is in the early stages, the growth runway is long.
• Over the last 15 years, CELH has generated a 40% annualized return for shareholders compared to 15% for the broader U.S. equity market.

With temperatures well below freezing in many parts of Canada, it's only fitting that Celsius Holdings, Inc. NASDAQ: CELH is heading north.

Last week, the fitness energy drink maker announced that it is expanding its distribution agreement with PepsiCo Inc. NASDAQ: PEP to include Canada. The company also reached a sales and distribution deal with Suntory Beverage & Food Limited OTCMKTS: STBFY, which will spread its healthier energy drinks throughout the U.K. and Ireland. Following through on a promise to bolster its international footprint, Celsius stands to energize an already strong track record of growth.

The move came a few days after Bank of America NYSE: BAC downgraded Celsius shares from Buy to Neutral, asserting that market share is "unexpectedly declining." The stock has been a steady momentum trade mainly because of the Pepsi partnership that is putting Celsius cans in more stores and geographies. Cautious B of A commentary, however, sparked a selloff that has put CELH more than 25% below its December 2023 record high.

Nevertheless, in recent days, Wall Street has come to the company's defense.

On Monday, Wedbush reiterated its Buy rating on Celsius, becoming the third straight research firm to do so after the B of A downgrade. Last week, Piper Sandler and Roth MKM confirmed their bullish opinions, suggesting the stock's uncharacteristic drop is an opportunity. The trio offered price targets in the $70 to $76 range which implies a nearly 50% upside from current levels. Even B of A's $65 target implies over 25% return potential from Monday's close.

It's easy to understand why the Street has been quick to pounce on the downturn.

Celsius is growing roughly 10 times faster than the overall U.S. energy drink market. It has more than doubled its domestic market share since last year and become a formidable threat to Monster Beverage Corporation NASDAQ: MNST and Red Bull. Even if signs of a sales slowdown are emerging, Celsius will likely deliver above category (and well above beverage industry) growth.

How is Celsius winning?

Celsius has carved out a winning niche in the fast-growing energy drink space by offering consumers a line of healthier energy drinks, on-the-go powder packets and protein bars. Tailored to both fitness buffs and health-conscious office workers, the products are sugar-free and come in a variety of unique flavors. Since the company has a limited overseas presence and its Pepsi tie-up is in the early stages, the growth runway is long. Any temporary setback in market share will probably be just that — temporary.

On Amazon.com Inc. NASDAQ: AMZN, Celsius is now the best-selling energy drink. It boasts a 21.4% market share compared to 18.6% and 13.0% for Monster and Red Bull, respectively. In traditional retail channels, it accounts for 39% of category unit growth. As convenience store shelves get flooded with new energy drink challengers, Celsius is leading the way. 

If Celsius can replicate its successful playbook in new markets — including its 'better-for-you' energy message — international growth will probably be explosive. Its North American business, which accounts for 96% of revenue, achieved 108% sales growth through the first three quarters of 2023. The brand is likely to resonate with foreign exercise enthusiasts seeking cleaner body fuel and find its way into new walks of life as it has in the States.

When does Celsius report earnings?

Celsius has yet to announce the date of its fourth quarter financial results, but it is likely to be in early March 2024. As usual, market expectations will be sky high. But if history repeats, the company will outperform.

Celsius topped consensus revenue and earnings forecasts for each of the first three quarters of 2023. It posted record third quarter revenue of $385 million, driven by increased distribution points, increased customer awareness, and more SKUs per retail location.

For the fourth quarter, analysts anticipate $330 million in revenue, representing 85% year-over-year growth. Profits are expected to triple. The energy drink maker has routinely sprinted past Street estimates though, and could get a boost from holiday shopping traffic.,

Over the last 15 years, CELH has generated a 40% annualized return for shareholders compared to 15% for the broader U.S. equity market. With international growth still to come, it wouldn't be surprising to see this torrid pace maintained over the next 15 years.