Is It Too Late to Buy Celsius Stock?

You'd struggle to find businesses that have rewarded their shareholders more than Celsius (NASDAQ: CELH) has. The energy drink purveyor, known for its health-focused branding and natural ingredients, has seen shares catapult 2,560% higher in the past five years. That type of return would have turned a $1,000 investment into a jaw-dropping $26,600 today.

But after such a phenomenal performance, is it too late for investors to buy this booming beverage stock ?

Slowing growth

Celsius just reported second-quarter 2024 financial results (ended June 30). The business beat Wall Street estimates on both the top and bottom lines, which was a pleasant surprise.

Sales rose 23% to total $402 million, driven by balanced percentage gains in North America and internationally. It's worth pointing out that Celsius is still a domestically driven enterprise, as only 5% of revenue came from outside the home continent. By having PepsiCo as a strategic distribution partner, perhaps Celsius will find success in building a more global presence.

What shareholders might immediately recognize is the revenue deceleration taking place. In 2021, 2022, and 2023, sales surged 140%, 108%, and 102%, respectively. But these rapid gains are likely a thing of the past. To its credit, though, Celsius has gained market share, compared to a year ago, in the energy sector at a time when the two dominant brands, Red Bull and Monster , are losing share. That's encouraging.

The top line might be experiencing a notable slowdown. But Celsius is starting to flex its muscles on the bottom line. This is an indication of operating leverage, an instance where a business's revenue increases at a faster rate than its expenses.

In the last quarter, the company generated $79.8 million in net income. That figure represented a 55% year-over-year jump. Moreover, it translated to a superb 19.9% net profit margin .

Monster Beverage, which reports almost five times the sales Celsius does, posted a net profit margin of 22.4% in the three-month period that ended June 30. I suspect this is Celsius' upper limit, so there might not be much more room to expand the company's margin.

Valuation vs. quality

At their all-time high in March, Celsius shares traded at a nosebleed price-to-earnings (P/E) ratio of 126. The market was overly enthusiastic about the company's prospects, as investors probably assumed that triple-digit percentage growth would occur indefinitely. This belief was clearly wrong.

However, even though the stock now trades at a more reasonable P/E multiple of 39, I still don't think Celsius makes for a worthy investment candidate. That's because, quite frankly, I don't believe it's a high-quality business.

Let's look at the industry. Barriers to entry are virtually nonexistent, and there are no switching costs for consumers. Given the fast growth in the energy drink area, more competition is likely to pop up, creating an even more crowded market.

Therefore, it's probably an accurate assumption that Celsius doesn't possess an economic moat. At its current small scale, its brand most likely doesn't have the affinity from customers that you see with a Coca-Cola in the beverage industry broadly, and Monster in the energy drink market specifically.

A perfect argument in support of this is management's decision to engage in more promotional activity to mimic the pricing actions taken by its key rivals. If Celsius actually did have customer loyalty, it would be able to avoid this.

Even though Celsius trades 59% off its peak price, and it's at its lowest valuation in the past three years, I'm still not convinced that the stock is a smart buying opportunity. Consequently, the monster gains might be a thing of the past, meaning it's too late for prospective investors.

Neil Patel and his clients have 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 .