Is This $8 Billion Stock A Hidden Gem?

Celsius stock has been one of the most volatile in the market over the past five years, but is this a value or is the company in trouble? The wild thing is Celsius grew revenue 138% in the most recent quarter, and yet the stock trades for just 22 times forward earnings. So is this a value for a growth stock or is it a value trap? I want to ask John Quast that question. John, thanks for joining me. You're welcome. And I'll answer you. It's a value stock. Well, let's go through this because there's a lot going on with Celsius right now. We touched on some of the high-level numbers, and I'll put some of those charts up because the growth does look phenomenal, but there's also a lot going on under the surface. The company acquired Alani New. Now they're really their growth avenue. Also acquired Rockstar. So what were those strategic moves and acquisitions that they've made over the past year that have really reshaped the company? Well, we're basically going from a company that was a one-brand portfolio, which was its namesake Celsius brand. That brand over the last, let's call it six years, absolutely incredible growth. I don't know if it was quite a 100% compound annual growth rate, but it's somewhere in the ballpark. Went from very obscure, grew with its own distribution network, but eventually got in with Pepsi. And Pepsi basically became the preferred distribution partner. And that really helped kick its growth into overdrive. Eventually the sales for the Celsius brand, as it reached that number three status in the energy drink market behind Monster and Red Bull, once it reached that number three spot, it started to slow and it was able to acquire an upstart brand that was starting to take some market share. And that is Alani New. Very similar branding, very similar target audience. And it was able to acquire the company back, it's been a year now since the official acquisition happened. What is interesting about Alani New and what has gone well here is that Celsius was able to negotiate to get Alani New distributed into the Pepsi distribution network. Now, with those negotiations around the same time, Pepsi said, you know what? We'll stick to snacks. We'll stick to regular carbonated beverages. We'll even get into the prebiotic soda market, but we are going to let you have the energy market. Pepsi is also an investor here. So it gave, it didn't give, but it sold the rockstar brand to Celsius. So now we're a three brand portfolio really turning into a mini monster here. Yeah. So this is no longer the company that it was a year ago. And I think this is what's almost confusing for investors right now, because you look at, we talked about the high headline number growth of 138%. That's not really telling the full story. Where is that growth really coming from within the business on a year over year basis? And where is there not quite as much growth? Because I would think that Alani New and Celsius are kind of doing a little bit differently. Oh, absolutely. When you buy a business that is already generating revenue and you add it to yours, yes, it looks like you have a lot of growth, but that is inorganic. You are simply just adding its revenue to yours. What's more important to look at is the sales metrics. Now, if you look at Celsius' sales in the most recent quarter, this isn't dollar amount. This is actual sales, like actual can of product going out the door up 6% year over year. So not fantastic. That's for the Celsius brand. The Celsius brand itself. So if it has the name Celsius slapped on the can, up 6% year over year. Now, Alani New, on the other hand, up 100% year over year. So Alani New is still gaining a lot of traction. I am really happy that Celsius was able to grab onto that brand right before it hit a super inflection point. Well, is this the same playbook that Celsius went through a handful of years ago when they made that partnership with the distribution partnership with Pepsi? Because one of the things that Pepsi does is they bring in customers like Target and Walmart. So the big box retailers. So yes, Celsius was growing tremendously before that deal happened, but that took them nationwide, at least in the US, and just expanded their potential addressable market to a whole new level. I know I didn't actually see Celsius in stores in the Midwest here until after that partnership took hold, and then you started to see it all over the place. Are we seeing a similar thing happening with Alani New, that they were a little bit smaller on the distribution scale, and then suddenly plug into Celsius and Pepsi, and bam, you have 100% growth? Some of that is true. So if you can rewind the clock, there's actually a company that went under. It was distributed by Pepsi. It was called Bang Energy. And there were some problems between Pepsi and Bang, and that's when Bang was dropped, Celsius was brought in, and yes, that was a great thing for Celsius. Now, you look at Alani New, it only entered into the Pepsi distribution system late last year. So potentially, still a lot of growth to come in as a result of having this affiliation now with Pepsi, and being able to take perhaps some shelf space from some other competitors. Pepsi, of course, very, very strong in distribution. Another part of the playbook here for Celsius that really goes, I think, underappreciated is the profitability ramp up. And what it did was it became vertically integrated. So previously, it was having its beverages made by a distributor. It actually wound up acquiring that distributor so that it could bring everything in-house, vertically integrate, and boost the gross margin. And it did so, I don't recall the exact numbers, but it was significant. Celsius intends to do the exact same thing now with Alani New and with Rockstar. So Rockstar was already in Pepsi's distribution system, so don't expect a ramp up in sales there necessarily. But bringing that manufacturing in-house could get a few points of gross margin, could help improve the profitability metrics for Celsius over the long term. Trey Lockerbies This is kind of the back and forth that a lot of these drink companies, I know Coca-Cola has gone through this. You buy your bottler and your distributor, you sell your bottler and distributor. So it is kind of back and forth depending on what valuations look like, partly. Okay, let's come to what the market thinks about the company. Because if you look at their current drawdown, it's about 56% from their high just in the past year. It's even more than that if you go back a couple of years to their all-time peak. But the market is at least seeing, we've got some slowing growth at Celsius. You mentioned it, they are still growing. And as a total brand, they're taking market share. But does Alani New eventually hit this wall that the Celsius brand does? The same time, you have more competitors coming into the market. The one that I think has gotten the most attention is the Kirkland brand, bringing essentially a clone of Celsius products into their stores. This was a big distribution avenue for Celsius a couple of years ago. Amazon was kind of the same thing. Maybe not the kind of growth that you want because those companies tend to just kind of pull all those things in-house. But how do you think about that competition? Is a brand like Celsius or Alani New, does that have the staying power of a, we go back to Pepsi or Coca Cola? Or is this going to be the kind of thing where it's just going to be the flavor of the day and their store shelves are just going to change five or 10 years from now? So you bring up the Kirkland brand, and you know what? You can look at the timing here of the launch of the Kirkland brand and the stock price of Celsius going down. It is eerily correlated. So I think that that is on investors' minds. The Kirkland brand, of course, is owned by Costco. Last I checked, Dr. Thunder was released by Walmart in the early 90s. And last I checked, Dr. Pepper is doing just fine, even though Walmart is perhaps the biggest retail outlet for Dr. Pepper that there is. In the same way, yes, are some Costco members going to buy Kirkland products? Absolutely. Is this something that is fundamentally a threat to Celsius' business? I do not think so. Overall, the energy drink market is still growing, albeit slower than in the past. I think that Celsius is becoming a very top player in the space. And we're just talking about North America at this point. As of the most recent quarter, the most recent year, over 90% of sales still come from North America, not international markets. So you look at that, it is getting into other countries. Now we have a three-branded portfolio going into international markets. That can drive a lot of long-term growth. All right. So the argument is that this is a good value, trading for 22 times forward earnings. We talked about that. There's potential for margin expansion as they bring in some of this manufacturing in-house. And you have tailwinds from international. What else should investors think about when they're considering Celsius stock right now? I think that's about it. I mean, those are the two big things. I think that you can maintain a double-digit CAGR over the next five years. I don't think it'll be 100% growth like the most recent quarter, but I think it will be north of 10 on average. And you do get that margin expansion, I believe, by just having these brands now. We're starting to consolidate the operations. We're starting to streamline things, the product portfolio. There are international markets that are going to help sustain that. So there are some really interesting things there. Another thing to watch though, is that the company does have some other ideas in the pipeline, such as hydration packs, such as some branded energy bar snacks. There's some opportunity to create a broader beverage and snack portfolio here. Like a mini-Pepsi. Like a mini-Pepsi. And remember, Pepsi is an investor here, so there is a vested interest in seeing this success. Yeah. I also want to note that the distribution relationship with Pepsi, while it has been a positive, it has been a little bit tumultuous. And that's one of the reasons that margins have been up and down over the past couple of years. Celsius had to incentivize Pepsi and Pepsi's sales staff to push their products instead of Celsius's products. What I think has changed in the last year or so is now Celsius has that broad portfolio of energy drinks, and Pepsi does not have its own energy business to push itself. So if customers are moving away from, let's say, Pepsi itself, this carbonated drink, to products like Celsius and Elaninu, Pepsi itself doesn't necessarily have a competing interest. So maybe that makes that relationship a little bit more symbiotic than it was contentious over the last couple of years. Thanks so much for your thoughts, John. Let us know what your thoughts on Celsius and the stock is in the comment section below. Thanks for watching, everybody. We'll see you here next time.