This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!

About Celsius

In the spirit of being completely and utterly candid, we think the beverage category is one of the most brutal, unforgiving, expense-filled, messy and stressful industries to operate in of all time.

First, it is an industry that is extraordinarily saturated with beverage companies that have practically narrowed down their product(s) and distribution to an absolute science, Dr. Pepper, PepsiCo and Coca-Cola being great examples (even though Celsius competes more directly with Red Bull and Monster), and, of course, even outside of their respective brands there are many other general and specialized beverage lines that one can find at their local gas station or Whole Foods down the road that have established their niche and related operations, however, it hardly makes the space any less horrifying from the standpoint of competition. 

Additionally, one of the other things we despise about the beverage space is the fact that consumer craves and tastes evolve regularly and evolving and staying with or ahead of the consumer and their wants is both stressful and expensive, to say the least.

So, that admittedly doesn’t make us exactly impartial when it comes to the newest and hottest beverage company out there, Boca Raton, Florida-headquartered Celsius Holdings.

Also, on a more personal note, I was at my local gym recently and had the opportunity to try one of Celsius’ drinks and I thought it was disgusting and found myself nearly panting for some relief to be found in a sugar and flavor-filled Gatorade.

Of course, just because I don’t like something or a certain product doesn’t mean that the masses don’t enjoy the company’s product line, as I have seen plenty of folks in and around Austin, Texas, for example, happily taking swigs of their Celsius beverages.

We will admit that even though consumer choice tends to evolve at an alarming rate, especially in the beverage category, if the product and marketing is on point, adoption and customer loyalty tend to be in the bag.

Heck, just look at the previously mentioned beverage giants and their success(es).

At any rate, today is about Celsius, which specializes in fitness drinks with all sorts of flavors and skus and its exponential gain in consumer and brand popularity has also seemingly extended into its share price, as its shares (NASDAQ: CELH) are trading at all-time highs (as of this publication), up more than 100% over this last year’s span of time alone.

Therefore, at face value, the risk-reward ratio seems a bit skewed in a negative manner, however, the numbers could support this company’s currently lofty share price after all, at least, we’ll never know until we investigate further, not to mention that this company could be setting itself up to be a prime acquisition target for an already massive beverage manufacturer, seller and distributor.

Celsius’ stock financials

Celsius Holdings is trading at a share price of $181.41 with an accompanied market capitalization of $15.22 billion along with no annually distributed dividend nor a readily available or listed price-to-earnings (P/E) ratio at the time of this writing, which, considering what we know about this company so far, makes perfect sense.

Specifically, Celsius’ total annual revenues have likely been growing at a rather rapid rate and thus the company has opted to invest and reinvest in its business so as to offset any cash burn it might be facing, therefore, it might not have any earnings to display at the moment which is also justifies this company not issuing an annual dividend to its shareholders at this juncture, as this company needs to keep cash flowing into the business, likely for years and years to come.

As it relates to the overall state and condition of the company’s balance sheet, it is in fantastic shape at the moment with its total assets standing at around $1.2 billion while its total liabilities are perched well below at $357 million, more than sufficiently covering this company and protecting it from being mired in an overlevered state, which is great to see, even though it is more than likely growing like hot cakes at the moment.

Speaking of growth, according to the company’s income statement, Celsius’ total annual revenues have been indeed growing, settling at $53 million in 2018, rising the following year to $75 million, $131 million in 2020, $314 million in 2021 and scoring its most recently reported total annual revenue figure of $654 million, as reported in 2022.

In recent years, Celsius has doubled its year-over-year (YOY) revenues many times over, which isn’t something that a lot of growing or mature companies can say, especially a consumer beverage brand that not only has survived, but clearly thrived during the initial impact of COVID-19, likely through sales it generated through its e-commerce partners and/or on a direct-to-consumer basis through its website.

Celsius successfully pivoted and that is something that is certainly worth noting.

Onto the topic of the company’s cash flow statement, Celsius’ net income and total cash from operations haven’t been as bad as we had initially anticipated, only suffering some minor net income losses in 2018 (-$11 million) and a bit of a more pronounced loss in 2022 of -$187 million, indicating that associated expenses are up, perhaps with respect to transporting and distributing and/or accounting for rising costs in the metal it uses for its cans, which, thankfully, wasn’t that bad when you consider the company’s revenues that same year as well as the fact that its total cash from operations were $108 million (yes, positive) that same year.

Celsius’ stock fundamentals

In relation to the company’s listed trailing twelve month (TTM) net profit margin, we aren’t expecting a whole lot given just how competitive the on the go beverage space is (have we mentioned beverage is a brutally competitive market?), especially from Celsius as it is growing at a relatively rapid rate and with growth usually comes a comparably muted TTM net profit margin, as growth, most of the time, comes at a cost and impacts the bottom line, or a company’s profit.

According to the figures displayed on TD Ameritrade’s platform, we were far from off the mark on this one, as Celsius’ TTM net profit margin is reported as -11.59% to the industry’s respective average of 14.17%, which is certainly a difference not exactly favoring Celsius, however, we are glad that it isn’t a surprise or even worse than we had initially thought given that this is a company growing in an existing, competitive category going up against some very seasoned competitors that already have dug their claws well within different beverage categories along with premier marketing, packaging, distribution and other edges they have flexed over the last years, if not decades.

We simply hope that over time, Celsius inches incrementally closer to the industry’s respective average, or at least towards breaking even and being able to sustain a positive TTM net profit margin as it perhaps becomes a more mature player in the beverage category.

The company’s TTM returns on assets and investment(s) are correspondingly negative and well below those of the industry (on average), which, again, is just sensible at this point and hopefully some fruit can be borne in the years to come.

A Consideration for Celsius

The fact of the matter is that Celsius is a great brand that many within the younger generations enjoy and resonate with, which bodes pretty well for a company such as this on a standalone basis given that, in essence, they might just literally have a consumer segment for life.

This being the case, it would only make sense that other beverage companies might be interested in wholly acquiring Celsius, especially those that already maintain a presence in the de facto energy drink realm, with companies such as Monster Beverage Corporation, PepsiCo (which owns Gatorade) and maybe even Coca-Cola, as it might be looking to expand its portfolio a bit outside of their apparent comfort zones in soda and water.

The problem is that Celsius is basically more expensive than it has ever been (according to its present valuation and associated share price) and it might not be in any of these potential buyers’ best interests to even come close to massively overpaying for this company, but on the other hand it might just make perfect sense if these companies are finding that the categories and spaces Celsius has and is penetrating are increasingly growing their total addressable market (TAM) and therefore said companies should perhaps bid for Celsius while it’s still relatively inexpensive.

In other words, if this company continues growing, it might just become far too expensive and the window of opportunity could shut sooner rather than later.

At any rate, Celsius could certainly act as a short and long-term growth lever for any one of these mature, slow-growth companies.

Should you buy Celsius stock?

All things considered, we deem Celsius to be a rare, already dominant growth company within the beverage sector that is putting the industry and the consumer world on notice.

Nevertheless, this still hardly changes our personal disdain towards the sector, not to mention that its stock (NASDAQ: CELH) is trading at some of the highest highs it has ever seen and that this is a company that is also tasked with managing a multitude of fixed and variable costs, including subtle yet important to consider commodity pressures (i.e., paying for and/or putting together aluminum cans) and a practically ever changing consumer to deal with (no offense, everyone, but we are complex beings).

Its balance sheet is in great, recession-ready condition, its revenues have been growing at a splendid year-over-year (YOY) pace, its cash flow has been fine and its TTM net profit margin and relevant return metrics have been subpar, but to no one’s surprise. 

Given all of this data and information, it still doesn’t make all that much sense to buy a stake in the company trading at the top of its historical valuation, largely exposing ourselves to outsized downside risk (in our opinion, at least) and thus we think it makes the most sense to offer this company’s stock (NASDAQ: CELH) a “sell” rating for the time being.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.