Better Buy: Celsius vs. PepsiCo

Celsius (NASDAQ: CELH) has been a juggernaut of the beverage industry, with its shares rising nearly 160% over the past two years. A large portion of that rally was driven by its rapid growth and its partnership with PepsiCo (NASDAQ: PEP) , which invested $550 million in the energy drink maker and became its U.S. distributor in August 2022. PepsiCo's stock stayed nearly flat during the same period.

But over the past three months, Celsius' stock has plunged 37% as PepsiCo's stock dipped 4%. Let's see why the high-growth energy drink maker underperformed its top investor -- and if that trend will continue throughout the rest of the year.

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Why did Celsius' stock fizzle out?

Celsius carved out its own niche with its sugar-free energy drinks which were made from natural ingredients like green tea and ginger. That health-conscious approach attracted a lot of younger customers, and it quickly grew into the third-largest energy drink brand in the U.S. after Red Bull and Monster Beverage . That rapid growth prompted PepsiCo to invest in Celsius in a deal that mirrored Coca-Cola 's initial investment in Monster in 2015.

Celsius' revenue surged 140% in 2021, 108% in 2022, and 102% to $1.26 billion in 2023. Its margins also expanded as it scaled up its business. From 2021 to 2023, its gross margin rose from 40.8% to 48%, while its adjusted earnings before interest, taxes, depreciation, and amortization ( EBITDA ) margin jumped from 10.7% to 22.4%.

However, investors should brace for a slowdown in 2024 as it laps the initial expansion of its U.S. distribution deal with PepsiCo. Its market share in the U.S. also dipped slightly in May , according to NielsenIQ. It secured a new overseas distribution deal with the Japanese beverage giant Suntory for the U.K., Ireland, and Canada this January, but that partnership probably won't move the needle, since its international revenue only accounted for 4% of its 2023 sales.

Even as it grapples with these near-term challenges, analysts expect Celsius' revenue to rise 28% to $1.69 billion this year as its adjusted EBITDA grows 30% to $386 million. Those estimates seem healthy, but they likely disappointed investors who had expected it to maintain its hypergrowth rates from the past three years. But based on that outlook, its stock looks reasonably valued at 8 times this year's sales and 33 times its adjusted EBITDA.

Why did PepsiCo's stock tread water?

PepsiCo isn't just a soda maker. It sells a broad range of fruit juices, teas, sports drinks, bottled water, and other non-carbonated beverages, as well as packaged foods through its Frito-Lay, Quaker Foods, and Pioneer Foods divisions. The scale and diversification enables the company to generate steady growth through economic downturns.

PepsiCo's organic revenue rose 9.5% in 2021, 14.4% in 2022, and 9.5% in 2023. Inflation has been driving up its costs, but its gross margin still expanded from 53.3% in 2021 to 54.2% in 2023 as it repeatedly shrank its package sizes and hiked its prices to offset that pressure. Its operating margin dipped from 14% in 2021 to 13.1% in 2023, but it still grew its earnings per share by repurchasing $2.6 billion in shares during those three years.

For 2024, PepsiCo expects its organic revenue to grow at least 4% as its core constant currency earnings per share increases by more than 8%. Analysts expect its reported revenue and generally accepted accounting principles ( GAAP ) earnings to increase 3% and 20%, respectively. Those are stable growth rates for a stock which trades at 21 times forward earnings, and it pays an attractive forward dividend yield of 3.3%.

But despite its evergreen advantages, PepsiCo's stock isn't really cheap enough to attract value-seeking investors or growing fast enough to dazzle growth-oriented investors. Its dividend yield also isn't high enough for income investors when CDs and T-bills are paying risk-free 4% to 5% yields. As a result, many investors seem to be shunning PepsiCo as hopes for lower interest rates make both higher-growth stocks and higher-dividend stocks more compelling investments.

The better buy: Celsius

PepsiCo is still a solid long-term investment, but Celsius has more growth potential. I believe PepsiCo will continue to tread water for the rest of the year as it fails to impress growth, value, or dividend investors. But Celsius could bounce back after it fully laps its distribution deal with PepsiCo, stabilizes its U.S. market share, and continues to expand overseas.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius and Monster Beverage. The Motley Fool has a disclosure policy .