Celsius Holdings Inc (CELH) Optimism Persists Among Analysts Despite 30% Decline

Company: Celsius Holdings, Inc. (NASDAQ: CELH)

Report Date: June 17, 2024

Prepared by: Senior QoE Analyst

Why Analysts May Remain Bullish on Celsius Stock Despite Recent Volatility

Celsius Holdings (CELH) has experienced remarkable growth, becoming a significant player in the energy drink and functional beverage market. Despite this trajectory, the stock has seen periods of volatility, including notable pullbacks such as the one observed around May 2024 (approx. 20-30% from its highs earlier in the year) following its Q1 2024 earnings report. While some investors grew cautious due to perceived deceleration in U.S. revenue growth or conservative gross margin guidance for subsequent quarters, many analysts maintain a bullish outlook. Key reasons for this optimism often include:

• Exceptional Revenue Growth: Even with slight deceleration from peak rates, Celsius continues to deliver industry-leading revenue growth, driven by expanding market share and strong consumer demand.
• PepsiCo Distribution Synergy: The strategic distribution agreement with PepsiCo, initiated in late 2022, continues to unlock significant shelf space and broaden market penetration across various retail channels in North America. The full impact of this partnership is likely still materializing.
• International Expansion Potential: Celsius has only scratched the surface of international markets. Recent entries into Canada, UK, and other regions represent substantial long-term growth avenues.
• Strong Brand Equity and Innovation: The brand resonates strongly with health-conscious consumers. Ongoing product innovation, including new flavors and potentially new product lines, helps maintain consumer excitement and market relevance.
• Improving Profitability and Margins: The company has demonstrated a clear path to sustainable profitability, with significant gross and operating margin expansion as it scales. Q1 2024 showed record gross margins.
• Market Share Gains: Celsius continues to capture market share from established competitors, indicating a superior product offering and effective marketing strategies. According to some market data sources, Celsius has become the #2 energy drink in the US by market share in certain channels.
• Valuation Re-rating as Opportunity: For long-term believers in the Celsius story, stock price pullbacks, if not driven by fundamental deterioration, can be viewed as attractive entry or accumulation points.

This Quality of Earnings (QoE) report will delve into the financial performance, business model, and growth trajectory of Celsius Holdings to provide a balanced assessment supporting (or challenging) this bullish sentiment.

Executive Summary

This Quality of Earnings report provides an analysis of Celsius Holdings, Inc. (CELH) based on financial data up to and including the first quarter of 2024. Celsius has demonstrated phenomenal revenue growth, driven by its popular fitness-focused beverage offerings and significantly amplified by its distribution partnership with PepsiCo.

Key Findings:

• Sustained Hyper-Growth: Revenue grew from $314.3 million in FY2021 to $1,321.4 million in FY2023, and $1,417.2 million for the trailing twelve months (TTM) ending Q1 2024.
• Significant Margin Expansion: Gross margin improved from 41.0% in FY2021 to 47.0% in FY2023, reaching 51.2% in Q1 2024. Normalized EBITDA margins have also shown strong improvement.
• Turnaround to Profitability: After a net loss in FY2022 (largely due to one-time distributor termination fees), Celsius reported strong net income in FY2023 ($226.8 million) and Q1 2024 ($77.8 million).
• Quality of Earnings: Earnings quality is generally high, with strong cash flow from operations. The primary normalization adjustments relate to stock-based compensation and a significant one-time distributor termination fee in FY2022.
• Business Model Scalability: The asset-light model (outsourced manufacturing) combined with PepsiCo's distribution network provides significant scalability.
• Dependence on Key Partner: Heavy reliance on the PepsiCo distribution agreement presents a concentration risk, though currently a major strength.
• Intense Competition: The beverage market is highly competitive, with large, well-funded players. Sustaining market share gains requires continuous innovation and marketing investment.
• Growth Rate Sustainability: While still high, the triple-digit growth rates will inevitably moderate. Managing expectations and continuing to execute on expansion strategies will be crucial.

Overall, Celsius exhibits strong underlying financial health and a robust growth trajectory. While risks exist, the company's performance and strategic positioning appear to support a generally positive outlook, aligning with reasons for analyst bullishness even amidst market volatility.

1. Data Analysis

1.1. Income Statement Analysis & Normalized EBITDA

Celsius's income statement reflects explosive top-line growth. We've analyzed financial data for FY2021, FY2022, FY2023, and TTM Q1 2024.

Key Income Statement Metrics:

Normalized EBITDA Calculation:

To assess the underlying operational profitability, we calculate Normalized EBITDA by adjusting for non-recurring items and non-cash charges like stock-based compensation (SBC) and significant one-time expenses.

⁽¹⁾ FY2022 included a significant $155.2 million expense related to the termination of prior distribution agreements to facilitate the transition to the PepsiCo network.

Observations:

• Revenue growth has been consistently strong, exceeding 100% YoY for FY2022 and FY2023. TTM Q1 2024 revenue of $1.417 billion continues this impressive trend.
• Gross margins dipped in FY2022 due to higher input costs and supply chain pressures but recovered strongly in FY2023 and Q1 2024 (51.2%), indicating improved cost management, pricing power, and benefits of scale.
• FY2022 operating loss and net loss were heavily impacted by the one-time distributor termination fee. Excluding this, underlying performance was improving.
• Normalized EBITDA shows a clear positive trend in profitability and operating leverage, with margins expanding significantly in FY2023 and TTM Q1 2024.

1.2. Revenue Recognition, Cost Structures, and Margin Sustainability

Revenue Recognition: Celsius recognizes revenue primarily from the sale of its ready-to-drink beverages and powdered products. Revenue is recognized when control of the products is transferred to the customer, typically upon shipment or delivery, net of provisions for returns, discounts, and allowances. This policy is standard and appears appropriate.

Cost Structures:

• Cost of Goods Sold (COGS): Primarily includes costs of raw materials (ingredients, cans, packaging), co-packing fees, and in-bound freight. Fluctuations in commodity prices (e.g., aluminum for cans, sucralose, caffeine) and shipping costs can impact COGS.
• Selling, General & Administrative (SG&A): Key components include marketing and advertising, distribution costs (outbound freight, warehousing, fees to distributors), employee salaries and benefits (including significant stock-based compensation), and corporate overhead. Marketing is a crucial driver for brand growth. The PepsiCo agreement involves specific distribution fees.

Margin Sustainability:

• Gross Margin: Recent improvements to over 50% in Q1 2024 are very positive. Sustainability will depend on managing input costs, favorable product mix, pricing strategies, and benefits from increased scale with co-packers. Potential headwinds include commodity price volatility.
• Operating/EBITDA Margin: Significant operating leverage has been demonstrated. As revenues scale, fixed costs are spread over a larger base. Marketing spend will need to remain substantial to support growth but could become a smaller percentage of revenue over time. The efficiency of the PepsiCo distribution network should also contribute positively.
• Competitive Pressures: Intense competition could limit pricing power or necessitate increased promotional spending, potentially impacting margins.

1.3. Balance Sheet Analysis

A snapshot of key balance sheet items:

⁽²⁾ Increase largely due to PepsiCo's $550 million strategic investment in convertible preferred stock in August 2022.

Observations:

• Strong Liquidity: Cash position is robust, significantly boosted by the PepsiCo investment and strong operational cash flow. This provides ample flexibility for growth initiatives and working capital needs.
• Working Capital Management:
  • Accounts Receivable increased significantly with sales volume, particularly with the transition to PepsiCo's larger customer base. Days Sales Outstanding (DSO) should be monitored but appears manageable.
  • Inventory levels have also risen to support demand and new market entries. Inventory turnover will be a key metric to watch for efficiency. Q1 2024 shows a slight reduction from YE 2023, possibly indicating good inventory management.
• Low Debt: The company maintains a very low debt profile, enhancing financial stability.

1.4. Cash Flow Analysis

⁽³⁾ FY2022 Operating Cash Flow impacted by the net loss, working capital build-up for growth, and cash payments for termination fees (though part might be accrued).
⁽⁴⁾ FY2022 Investing Cash Flow primarily reflects the $550 million investment from PepsiCo being initially classified as marketable securities, then reclassified.
⁽⁵⁾ FY2022 Financing Cash Flow primarily reflects proceeds from issuance of convertible preferred stock to PepsiCo ($550 million).

Observations:

• Strong Operating Cash Flow Conversion: FY2023 and Q1 2024 demonstrate robust operating cash flow generation, underscoring the profitability and cash-generating capability of the business model at scale. This is a key indicator of earnings quality.
• Capital expenditures (part of Investing Activities) have been relatively low, consistent with an asset-light co-manufacturing model.
• Financing activities have been dominated by the PepsiCo investment in 2022. Q1 2024 financing inflow likely relates to proceeds from stock option exercises.

2. Business Model Assessment

2.1. Core Business Model, Revenue Streams, and Cost Drivers

Business Model: Celsius operates in the functional beverage industry, positioning its products as "better-for-you" energy drinks. Their core strategy involves offering a range of fitness-focused beverages that provide energy, accelerate metabolism, and burn body fat, appealing to health-conscious consumers. The model is characterized by:

• Brand Focus: Strong emphasis on brand building, lifestyle marketing, and influencer engagement.
• Asset-Light Operations: Manufacturing is outsourced to third-party co-packers, reducing capital expenditure requirements and providing production flexibility.
• Distribution Network: Historically used a mix of direct-store-delivery (DSD) distributors and direct sales. The pivotal shift was the August 2022 agreement making PepsiCo its primary U.S. distributor, significantly expanding reach and channel penetration.

Core Revenue Streams:

• Beverage Sales: The vast majority of revenue comes from sales of its ready-to-drink Celsius® Originals, Celsius Heat™, Celsius BCAA+Energy™, Celsius On-the-Go™ (powdered stick packets), and other product lines. Sales are primarily in North America but expanding internationally.
• Licensing/Other: Minor revenue from other sources.

Key Cost Drivers:

• COGS: Raw materials (aluminum cans, ingredients like caffeine, green tea extract, vitamins), co-packing fees, warehousing, and inbound freight.
• Marketing & Advertising: Essential for brand awareness, customer acquisition, and competing in a crowded market. Includes digital marketing, social media, sponsorships, and point-of-sale promotions.
• Distribution Costs: Freight to distributors, distributor margins/fees (especially under the PepsiCo agreement), and costs associated with direct sales where applicable.
• Personnel Costs: Salaries, benefits, and significant stock-based compensation for sales, marketing, and corporate functions.

2.2. Scalability and Sustainability

Scalability:

• Manufacturing: The outsourced manufacturing model is highly scalable. Production can be increased by engaging additional co-packers or expanding capacity with existing ones, without significant direct capital investment by Celsius.
• Distribution: The PepsiCo partnership provides immense scalability in the U.S. market, leveraging PepsiCo's vast DSD network, retail relationships, and logistical capabilities. International expansion will require building or partnering for similar distribution capabilities in new markets.
• Brand: The Celsius brand has demonstrated broad appeal and can potentially be extended to new product categories or geographic markets.

Sustainability:

• Consumer Trends: Aligned with growing consumer demand for healthier, functional beverages. This trend appears sustainable.
• Brand Loyalty: Celsius has cultivated a loyal customer base. Maintaining this through product quality, innovation, and effective marketing is key.
• Competitive Landscape: The industry is intensely competitive. Established giants (Monster, Red Bull) and numerous emerging brands constantly vie for market share. Sustained success requires continuous innovation, strong marketing, and effective defense of shelf space.
• Margin Viability: Current margin trends are positive. Long-term sustainability depends on managing input costs, maintaining pricing power, and achieving further economies of scale.
• Regulatory Environment: The beverage industry is subject to regulations regarding ingredients, labeling, and marketing claims. Changes in regulations could impact the business.

2.3. Key Operational Risks and Dependencies

• Reliance on PepsiCo: While a major growth driver, the heavy reliance on PepsiCo for U.S. distribution creates a significant partner dependency. Any deterioration in this relationship or underperformance by PepsiCo could adversely affect Celsius.
• Supply Chain Disruptions: Dependence on co-packers and global sourcing of raw materials expose Celsius to risks of supply shortages, quality control issues, and price volatility (e.g., aluminum, ingredients).
• Maintaining Brand Image: The brand's "healthy" and "functional" positioning is critical. Any negative publicity, product recalls, or issues related to product efficacy could damage brand reputation.
• Competition: Constant pressure from existing large players and new entrants. Failure to innovate or effectively compete on marketing and distribution could erode market share.
• International Expansion Execution: Expanding into new international markets carries execution risks, including adapting to local consumer preferences, navigating different regulatory environments, and establishing effective distribution.
• Key Personnel: Reliance on the vision and execution of its leadership team.

3. Growth Trajectory Evaluation

3.1. Historical Growth Rates and Drivers

Celsius has achieved explosive growth, predominantly organic, driven by:

• Product Appeal: Strong product-market fit with health-conscious consumers.
• Effective Marketing: Successful digital, social media, and influencer marketing strategies resonating with its target demographic.
• Expanding Distribution: Systematically increasing points of sale, initially through a network of smaller distributors and then catapulted by the PepsiCo agreement.
  • FY2021 Revenue Growth: 140.0% YoY
  • FY2022 Revenue Growth: 108.0% YoY
  • FY2023 Revenue Growth: 102.2% YoY
  • Q1 2024 Revenue Growth (vs Q1 2023): 36.9% (Note: This is still very high but shows a natural moderation from the hyper-growth phase as the base gets larger).
• Market Share Gains: Actively taking share from competitors. Data from sources like Nielsen/IRI consistently show Celsius outpacing category growth and increasing its market share significantly in the U.S.
• Innovation: Regular introduction of new flavors and product lines keeps the brand fresh and expands its consumer base.

Growth has been primarily organic. The PepsiCo investment was strategic capital, not an acquisition of revenue.

3.2. Projecting Future Growth Potential

Future growth is expected to be driven by:

• Continued U.S. Market Penetration: Further leveraging the PepsiCo distribution network to gain more shelf space, enter new channels (e.g., food service, institutional), and increase velocity in existing accounts.
• International Expansion: This represents a very significant long-term growth opportunity. Early moves into Canada, UK, and other markets are promising. Building out international distribution and brand awareness will be key.
• Product Innovation: Launching new flavors, exploring new product categories within functional beverages, or adjacent "better-for-you" segments.
• Increased Brand Awareness: Continued marketing investment to build broader consumer recognition and trial.

While triple-digit growth rates are unlikely to be sustained indefinitely as the revenue base expands, strong double-digit growth is a reasonable expectation for the medium term if execution remains strong. Market forecasts for the energy and functional beverage categories also remain positive.

3.3. Benchmarking Against Industry Peers

Celsius's growth rates have significantly outpaced those of its larger, more established peers like Monster Beverage (MNST) and Red Bull (privately held). For instance, Monster's revenue growth has typically been in the high single-digits to low double-digits in recent years.

Key Differentiators often cited for Celsius:

• "Better-for-you" positioning with thermogenic properties.
• Lower sugar/zero sugar options appealing to health trends.
• Strong appeal to a broader demographic, including more female consumers than traditional energy drinks.

In terms of valuation (e.g., EV/Sales, EV/EBITDA multiples), Celsius has historically traded at a premium to peers, reflecting its higher growth trajectory and market optimism. Following stock pullbacks, these multiples may become more comparable or attractive, depending on the extent of the correction versus ongoing growth expectations.

4. Charts and Tables

4.1. Financial Trends Chart

The chart above illustrates Celsius Holdings' impressive Revenue and Normalized EBITDA growth over the past three fiscal years and the trailing twelve months ending Q1 2024.

4.2. Key Financial Summary Table (Reiteration)

⁽⁶⁾ TTM Q1 2024 Net Cash from Operating Activities = Q1 2024 ($92.3M) + (FY2023 ($291.7M) - Q1 2023 ($32.7M)) = $92.3M + $259.0M = $351.3M. Correcting prior calculation which only listed Q1. Looking up Q1 2023 10-Q: Net cash provided by operating activities for three months ended March 31, 2023 was $32.7M. So, TTM Q1 2024 CFO = $92.3M (Q1'24) + $116.7M (Q4'23) + $100.8M (Q3'23) + $41.5M (Q2'23) = $351.3M. The table above now reflects this TTM calculation.

5. Summary of Findings & Conclusion

Strengths:

• Exceptional historical and ongoing revenue growth.
• Strong brand resonance and growing market share in a large addressable market.
• Scalable asset-light business model enhanced by the PepsiCo distribution partnership.
• Significant improvement in gross and normalized EBITDA margins, demonstrating operating leverage.
• Solid balance sheet with substantial cash reserves and low debt.
• Clear path to sustained profitability and strong operating cash flow generation.
• Significant untapped potential in international markets and product innovation.

Risks and Areas for Further Due Diligence:

• Sustainability of very high growth rates: Expect moderation, and focus on execution to maintain strong double-digit growth.
• Dependence on PepsiCo: Performance of this partnership is critical. Further diligence on terms and relationship health.
• Intense Competition: Ongoing monitoring of competitive actions and Celsius's market positioning.
• Input Cost Volatility: Assess hedging strategies and exposure to commodity price fluctuations (e.g., aluminum).
• International Expansion Execution: Closer look at specific market entry strategies, challenges, and initial performance in new geographies.
• Inventory Management: Ensure inventory levels align with sales growth and turnover rates remain healthy.

Conclusion:

Celsius Holdings, Inc. presents a compelling growth story backed by strong financial performance and improving profitability. The quality of its earnings appears high, particularly evident from FY2023 onwards, with robust operating cash flow and significant margin expansion. Adjustments for non-recurring items (primarily the 2022 distributor termination fee) and stock-based compensation provide a clearer view of its strong underlying operational trajectory.

While the stock may experience volatility due to high market expectations or short-term sector concerns, the fundamental drivers for Celsius – strong brand, effective distribution, product innovation, and alignment with consumer trends – remain largely intact. The risks identified are significant but not uncommon for a high-growth company in a competitive consumer sector. Continued execution on its strategic priorities, particularly scaling with PepsiCo and expanding internationally, will be crucial for sustaining its growth trajectory and justifying a premium valuation. The reasons for analyst bullishness, centered on these growth drivers and the long-term market opportunity, appear well-founded based on this QoE analysis.

Sources:

• Celsius Holdings, Inc. Form 10-K for the fiscal year ended December 31, 2023. (Filed with the SEC on February 29, 2024)
• Celsius Holdings, Inc. Form 10-Q for the quarterly period ended March 31, 2024. (Filed with the SEC on May 9, 2024)
• Celsius Holdings, Inc. Form 10-Q for the quarterly period ended March 31, 2023. (Filed with the SEC on May 9, 2023)
• Celsius Holdings, Inc. Investor Relations website. (investors.celsiusholdingsinc.com)
• Various financial news outlets and market data providers for analyst sentiment and market context (e.g., Bloomberg, Reuters, Yahoo Finance, MarketWatch). (General reference for context on "analyst bullishness" and stock performance around earnings).

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