Energy drink maker Celsius Holdings(NASDAQ: CELH) is never boring. Its stock price nearly quintupled in the two years leading up to late May 2024, but Celsius investors have lost two-thirds of that peak in the last five months.
Many investors see a big opportunity in that sharp price drop. Energy drinks are usually served cold, but they have been a red-hot investing market for decades. If you bought $10,000 of Monster Beverage(NASDAQ: MNST) stock 20 years ago, when it was still called Hansen Natural, you'd have $1.9 million in the bank today. And Monster is still smaller than the privately held Red Bull empire.
Celsius Holdings found a unique angle to approach this lucrative market, basing its drink recipes on all-natural ingredients and health-oriented research claims. Could this mid-cap stock rise to Monster-level gains in the long run, setting early investors up for life?
How Celsius could make it big
Anything is possible, of course. Celsius has a world-class distribution partner in PepsiCo(NASDAQ: PEP), just like Monster's Coca-Cola(NYSE: KO) distribution deal. Having these brand names in your corner can be a powerful selling point when negotiating supply contracts with grocery chains, gas station networks, and convenience store operators. That crucial shelf space doesn't come easy, unless an industry heavyweight is making deals on your behalf.
And Celsius' health-oriented products might just be what the doctor ordered. Trailing sales have soared 506% higher in three years, the company generates healthy cash profits, and healthier food options should always be a winner. Right?
Against this backdrop, Celsius's stock could not only regain its former highs but keep rising in the long haul. In a world where Red Bull and Monster have established long-lasting energy drink supremacy, surely there's room for another competitor with a particular focus on physical health.
This is a risky business
Celsius isn't a slam-dunk winner, though. Pepsi recently reduced the energy drink maker's inventory levels due to lower end-market demand. Consumer tastes are notoriously fickle, even in the health and wellness categories. Former market darling Peloton(NASDAQ: PTON) is a clear example of this ever-present investor risk, trading 95% below its peak stock price due to plunging consumer interest.
And what if Pepsi's inventory correction turns into a permanently lower order flow? Even after this year's brutal price correction, Celsius' stock still trades at the lofty valuation of 30.6 times earnings and 29.6 times free cash flow. These multiples are comparable to Monster's, but Celsius can't compete with the larger energy drink expert's global scale and lucrative profit margins.
Moreover, the energy drink market is becoming even more crowded with efficient distributor setups. Keurig Dr. Pepper(NASDAQ: KDP) is buying energy drink start-up Ghost, providing store-shelf support for another competitor with a health-based focus. If Monster and Red Bull can't stave off the Celsius challenge, maybe a properly supported Ghost brand will.
In other words, Celcius Holdings stock may be overpriced right now. And if the health-conscious marketing strategy doesn't hold up over the years, Celsius investors could be in for a painful future.
Strategies for investing in Celsius safely
So there are upsides and risks to buying Celsius Holdings stock today. I would certainly not recommend basing your entire stock portfolio around this stock -- or any other single investment. But it could play a supporting role in a diversified portfolio, perhaps adding a boost to your overall holdings if everything comes up aces over time. And if things go wrong instead, the price drop should be balanced out by other sectors and industries.
You can build that Celsius position over time with dollar-cost averaging strategies, and you can make a broader bet on energy drinks by picking up shares of both Monster and Celsius. The leading caffeinated drink masters have a track record of overcoming smaller challengers, but I get it if you believe that Celsius can do better. I'm just asking you to keep that investment relatively small so you don't lose too much sleep over the market risks.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $22,292!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $42,169!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $407,758!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of October 28, 2024
Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius, Monster Beverage, and Peloton Interactive. The Motley Fool has a disclosure policy.
