Now may be a good time to reflect on the alarming headline numbers.
The energy drinks space is large and crowded with many emerging players. What has attracted attention in recent years is Celsius (CELH -4.72%). The company was able to differentiate itself in a crowded field by making its portfolio sugar-free and by claiming that its drinks are thermogenic and allow you to burn calories even during your breaks.
That means Celsius has quickly jumped to number 3 in market share in the U.S. energy drink industry, ahead of Red Bull. monster beverage.
It's unclear whether Celsius will be able to move up further in this market – Monster and Red Bull are still quite far apart at the moment. However, the company continues to gain market share. As of the third quarter report, management believes the company's market share was 12.1%, up from 11.4% earlier this year.
At this point, an astute observer may raise an eyebrow. How was Celsius able to steal market share when Q3 sales were down a pitiful 31% year over year (including a 33% drop in North America)?
This apparent contradiction has a simple explanation. And the details here may help you figure out whether Celsius is a stock worth buying after the plunge.
Celsius' market share is rising, but revenue is falling
It's great for Celsior from a market share standpoint that someone wandering into a convenience store chooses a can of Celsior over a can of Monster or Red Bull, while the other two companies don't. It sold. But when a consumer goes to the register and pays, it doesn't count as Celsius' revenue.
Strictly speaking, Celsius isn't selling drinks to thirsty consumers. Rather, the company sells its beverages to distributors, who in turn sell them to retailers and consumers. That's how it works in the consumer goods sector. And typically, revenue is tied very closely to the final sale to the consumer. However, sometimes confusion can arise.
In this case, Celsius' top distributor ordered too much product last year. Now the distributor needs to correct the inventory level. As a result, Celsius' revenues took a hit of more than $100 million from this single partner. Still, final sales to consumers were up 7% year over year. Given that this 7% sales growth outpaced industry growth, the company's market share increased even though its revenue plummeted.
What does this mean for investors now?
Imagine I pitched Celsius stock as follows: “Celsius stock is down more than 70% from its all-time high, and last quarter's revenue is down more than 30%. Would you like to buy the stock?'' Many investors will probably decline this offer. After all, who would want to own stock in a company that is in deep decline?
However, if you reframed this pitch as follows: “While Celsius stock is down more than 70% from its all-time high, the company is a profitable energy drink company that is struggling with companies like Red Bull and Monster. What do you think?'' How to buy stocks? ” In this case, investors may take a closer look at Celsius stock.
Admittedly, a 31% revenue decline is alarming without context. However, Celsius' sales are still increasing and it is expanding its market share. Additionally, the company's gross margin for the first three quarters of 2024 was 50%, up from 48% in the year-ago period. At the end of the day, the company has over $900 million in cash and equivalents with zero debt. In other words, this is still a strong and growing business.
Additionally, investors shouldn't discount Celsius' potential for further growth. Only the US market is mentioned in terms of market share, and there is still opportunity there. But perhaps the bigger opportunity lies in the international market. In 2024, overseas revenue will only account for 5% of the total, but will increase by 36% year-on-year as Celsius enters new markets.
As you can see, Celsius' business is much better positioned for long-term success than the headline numbers and stock price would lead investors to believe. Issues with the largest distributors will normalize over time, so now may be a good time to buy Celsius stock.
John Quast has a position at Celsius. The Motley Fool has a position in and recommends Celsior and Monster Beverages. The Motley Fool has a disclosure policy.
