Chit Chat Stocks - Am I Buying Celsius Stock? (Ticker: CELH)

Episode Date: October 9, 2024

On this episode of Chit Chat Stocks, Brett goes through a research report on Celsius Holdings, owner of the Celsius energy drink brand. We discuss: (12:59) The Energy Drink Market Landscape (24:35) Celsius's Competitive Edge and Challenges (36:34) The Pepsi Partnership: A Game Changer (45:59) International Expansion: Opportunities and Risks (01:01:54) Valuation Insights and Future Outlook Stocks discussed: MNST, CELH, PEP ***************************************************** Subscribe to our YouTube channel: https://www.youtube.com/@ChitChatStocks  Follow us on Twitter/X: ⁠https://twitter.com/chitchatstocks  Follow us on Substack: ⁠https://chitchatstocks.substack.com/  ********************************************************************* Sign-up for a bond account at Public.com/chitchatstocks  A Bond Account is a self-directed brokerage account with Public Investing, member FINRA/SIPC. Deposits into this account are used to purchase 10 investment-grade and high-yield bonds. As of 9/26/24, the average, annualized yield to worst (YTW) across the Bond Account is greater than 6%. A bond’s yield is a function of its market price, which can fluctuate; therefore, a bond’s YTW is not “locked in” until the bond is purchased, and your yield at time of purchase may be different from the yield shown here. The “locked in” YTW is not guaranteed; you may receive less than the YTW of the bonds in the Bond Account if you sell any of the bonds before maturity or if the issuer defaults on the bond. Public Investing charges a markup on each bond trade. See our Fee Schedule. Bond Accounts are not recommendations of individual bonds or default allocations. The bonds in the Bond Account have not been selected based on your needs or risk profile. See https://public.com/disclosures/bond-account to learn more. ********************************************************************* FinChat.io is The Complete Stock Research Platform for fundamental investors. With its beautiful design and institutional-quality data, FinChat is incredibly powerful and easy to use. Use our LINK and get 15% off any premium plan: ⁠finchat.io/chitchat  ********************************************************************* Sign up for YellowBrick Investing to track the best investing pitches across the internet: joinyellowbrick.com/chitchat ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Our strategy of positioning Celsius as a global beverage leader for health-minded consumers remains our top priority. We continued our expansion further in traditional retail with great success, and we positioned the company for future growth with expanded roles within our ranks. In addition, we brought on high-performance individuals with diverse backgrounds and experience. John Fielde, the CEO of Celsius. Welcome into Chit Chat Stocks. My name is Brett Schaefer, and as always,

joined by Ryan Henderson. Ryan, I've done a lot of research on Celsius over the past month or so, and I want to play a little game with you. What year do you think that quote from Celsius was? Oof. 2020. Fairly close. 2018. Wow. Yeah. See, I think that, and the reason I said that and wanted to play that game is because, and we'll talk about this throughout the episode, the company has consistent branding and consistent focus. That quote could have been from 2013, could have been from 2018, well, it was from 2018, or it could have been last quarter because that's the same thing they've been saying for years and years and years.

Let's get into this episode. This episode is one of our stock research ones. We're covering, as you might know, Celsius Holdings, Energy Drink brand, taking a ton of market share. I don't know what else to call them very popular among younger consumers healthier sugar-free and one of the top performing stocks of the last five to seven years I think at one point it was a hundred beggar over a five-year period which is incredible I think definitely a hundred beggar from the lows when the CEO took he didn't take over in 2012 but came on to the company with a

kind of turnaround management team in 2012. We're going to get into it. This episode is a stock research podcast from me. We're going to get feedback and questions from Ryan, and then we're hopefully going to get to an actionable decision of whether I'm buying, selling, or keeping the stock on my watch list. I should say before recording this, or as we're recording this, I don't own any shares of Celsius, have not in the past, but we're going to decide by the end of the episode whether it belongs in my portfolio. Other news and notes, there's going to be a newsletter with charts along with this episode that you can find for free on the Chit Chat Stocks sub stack.

The link for that will be in the show notes. You can follow us on Twitter, YouTube, Spotify, Apple Podcasts to get all of the shows every time they're released, Wednesday or Sunday. And lastly, important, because I know that the stock's been a bit volatile, so I don't want to feel stale here. We're recording this on September 25th. Um, so two weeks, I think before this will come out, hopefully it won't be stale. There's no earnings before then, but if any news happens between now and then we didn't

talk about it because, well, we're not time travelers. Yes. And just to fact check you, Brett, over the last 10 years, this is a, it's up 16,847%. So a 168-bagger, roughly, over the last 10 years. It was, at one point, a 500-bagger less than a year ago. So it has had quite the drop, which we're going to talk about. And this may blow your mind, and I might have to go double-check this, but its total return since IPO, can you guess that? Well, I think the stock was actually...

Way higher than those 2012 lows at the IPO. So maybe 500%, 300%, something like that. It's only up 94%. Oh, hey, if you held, you're positive now. Since 2007, after this ride, it's only up 94%. I have no idea that was possible. I wonder if there's any bag holders that have held on since 2007. I'm guessing zero.

I think even the founder's gone, right? So yeah, let's go through this though. Let's talk about the history because it's a very unique story and it's always fascinating to learn how brands kind of emerged through the ranks in already solidified categories and Celsius has done just that. So why has Celsius succeeded? Why did they break through and become the third category leader in energy drinks? So in order to tell the modern history of Celsius, we need to look back at when current CEO John Fieldy took over as CFO in 2012. Here's a GQ interview that I think I'll link in the newsletter. But if you search GQ, John Fieldy, GQ Celsius, it'll pop up. I thought it was a fantastic

interview. And he really was open with the interviewer about how he runs Celsius and his management philosophy. So here's the quote. January 2012, the company was struggling. In the first 90 days after I started, we got delisted out of Costco, which represented about 60% of our revenue. Then we got delisted out of other retailers. At that point, I didn't think I was going to have a job in six months. We went back to the basics. We knew that we needed to build a strong foundation of loyal consumers. Loyalty is the only name of the game in consumer products. You can get trial, but if you can't build loyalty, you won't be able to build a brand. So we focused on continuing to build this loyal consumer within the fitness community.

That's a slow road. It's not flashy for investors, but Carl saw the bigger opportunity. We wound up getting the company to be profitable in late 2015. So back in 2012, new management took over Celsius Holdings. They decided the brand needed a turnaround and better positioning in the energy drink category. Ever since, Celsius energy drinks have been focused on fitness, health, and being a good-for-you drink. So progress was slow at first. They were a small enterprise.

We look at the revenue. I'll have a chart that we can share in here. Revenue was well under $50 million. I think we go back to December 2014, that's $14.6 million, so quite low. And they even had, like, they were way too overextended. They were selling in China, they were selling in Europe. I mean, that's just too much international expansion for a company that small. um but for the last five to seven years celsius decided to well and even longer than that they focused on the united states market they built brand loyalty and awareness through fitness which would be say gym distribution influencers online and other things like that and they focused on distribution through amazon where they could get better visual from a consumer and maybe work those sponsored listings, you know, work with the search results, kind of the SEO on that versus convenience and grocery stores where Monster and Red Bull are going to dominate that distribution. And it worked wonderfully. The counter positioning versus Red Bull and Monster worked like a charm.

Many people, especially women, are turned off from the brand perception of Monster and Red Bull. There's a certain, I'll call it stink to it, similar to cigarettes, probably not as bad as cigarettes. But the traditional products are loaded with sugar, they taste funky, and they market across the, you know, extreme sports and a lot of what I'll call in air quotes, bros. Do you agree with that? With that statement and Celsius sugar free tastes better focused on fitness and health. It was almost the complete opposite. And they said, Look, we know people want caffeine. But you don't like Monster and Red Bull, especially drinking them in a non party situation, at least with red bull in in that case and we got a product just for you yeah hindsight it was

brilliant counter positioning obviously if you're working at the company at the time you're probably thinking like we just lost costco we're losing retailers left and right we're in a tough spot like it doesn't feel like it's the you probably would think i'd rather have costco in the big retailers than this but actually switching and pivoting to that fitness community probably better position them for the long run and it was it was perfect because i think monster and red bull kind of have this like intense thrill brand to them which just doesn't quite resonate with women the same way that this fitness and health enthusiast type of messaging does so yeah i think they just did a really good job, carved out a niche. I don't think really any energy drinks

had the hyper focus on fitness enthusiasts the way Celsius did at the time. Yeah, that's exactly right. And we will talk about the numerous copycats coming onto the market from above and below, but that's for another section. And Ryan showed the revenue chart. It's an incredible revenue chart. Revenue in 2014, 14.6 million. Revenue in the last 12 months, $1.49 billion. So that is a hundred X in revenue in around a decade. And I want to highlight with these quotes and why I did that quote at the beginning. And the quote from that GQ interview is the consistency and the scalability of the Celsius strategy. In 2012, they decided to focus on fitness and health, and they have not stopped this messaging ever since. Consistency is key when

building brand loyalty. And at first, you know, they work through these small time gyms, smaller social media influencers, because that's what they can afford. But today, you know, they have brands with big, big brands, or excuse me, deals with big brands, such as these college football athletes that are stars, and then something like inter Miami and MLS and success in what I would call the sugar free category has been led by Celsius. So they have gone and taken the energy drink category from I think around 10 to 20% sugar-free to about 50% sugar-free. And it's almost like, I think a perfect analogy is the transition from regular soda to diet soda over the last, I don't know how long it's been, 50, 100 years, something like

that. Probably not a hundred years, maybe just a few decades. But that's also spawned a lot of copycats. You know, you got capitalism. You see that Celsius is doing well. This isn't something that's a patent. People can make sugar-free drinks. And they're getting attacked now from both above with Red Bull and Monster and below with many upstarts trying to get in on the sugar-free energy drink game. We'll get to the competitive threats later into this episode. But first, I want to talk about the wider energy drink category. Why is it so attractive? And what is happening in 2024 to cause all these stocks to fall? Because I should mention here, I think Celsius is down around 70% from all-time highs as we're reporting. And that's why we wanted to dive

in, do a little dumpster diving with this fallen angel. Yeah. Let me fact check you there real quick celsius total drawdown down 68 from recent highs yeah 68 yeah that's quite the fall and hopefully as we'll get into it the valuation is a little bit better but yeah what drives growth here from the category perspective i guess i kind of asked that one myself but i'll keep going energy drinks were popularized when red bull was invented in 1987 well i should say energy drinks were popularized outside of Asia, because I believe Red Bull, if I'm remembering the history correctly, was actually taken from some sort of a guy found a product in some Asian country. I want to say it's Thailand or China. But he took that and he's like, hey, we have nothing like this in

the West. I think people might like it. Boom, Red Bull was born. And they've done the marketing that they've done ever since. And then it was reinvigorated or maybe expanded to mainstream when Monster Energy took off in the 2000s. I would also say that Red Bull is a little bit more European and international focused. Monster, a little more United States focused, although they do have a lot of international exposure now. And for around 35 years, the category has grown its share of the ready to drink, drink spending, RTD. One thing to note, if you're looking at all these investor relations stuff, these, this category has a lot of acronyms, RTD, MULOC, all that stuff. sell it, they're selling. It's crazy. But if we look at this chart here, I'll show Monster

Beverages revenue. And they've grown a little bit of their market share. Let's see, Celsius Research show notes. And it's just grown by a very consistent amount for the last two decades. In 2004, they had $180 million in revenue. In 2024, it says here, which I think is the last 12 months, I'm seeing 7.4 billion. And the reason they've grown is because they took market share and the energy drink category as a whole has taken a lot of market share from other RTD categories. Fewer people are drinking soda. Fewer people are drinking orange juice. Orange juice, I guess, is smaller. Fewer people are drinking Gatorade. Fewer people are drinking coffee. Fewer people are drinking tea and a lot of them are switching to products like energy drinks and they're also

opting for you know things like carbonated seltzers um remember lacroix ryan remember when that was one of the hottest ducks in the world what national beverage corp yeah something like that i think it's done okay but it's done all right that's a little bit of a cautionary tale for celsius these things don't always turn into just monsters forever and ever and ever um question for you did when so do you know when celsius launched was it the same branding was it still the celsius energy drink i think so at least in from 2012 onwards and i'm not sure back at the ipo but i do know that the can used to look a lot different and now it looks a lot sleeker which i think is good okay previously it was maybe more colorful but i think they

understood. And they've talked about how the way the can looks matters when people are holding it. Definitely. And for context, anyone that doesn't know what the monster story, I recommend going and checking it out. If you remember 20 years ago, maybe a little more, there was a popular canned juice company called Hanson's Natural. Hanson's Natural has become one of the best performing stocks of all time because the i believe it was activist investors initially that were running hansens at the time launched monster and it has basically become the well i don't think hansens is around anymore so it is the entire company at this point yeah well hansens was sold to coca-cola but okay yeah um it is one of the best performing stocks

of all time and that's why i think people are excited about celsius as well and when you look at the entire category, like other CPG brands, energy drinks have been able to employ consistent price increases to drive revenue growth, at least over the long term. Now, we're about to talk about they're struggling this year, but it's not just a volume story. And it's been a long-term volume story, but it's also a pricing power story. It's the perfect combination of, okay, we can raise our prices by about 3% a year. People are still going to shop for our stuff. And we're also going to steal volume from everyone else. You can see this category share in this chart that I don't know if I'll share it here, but I'll include it in the newsletter from the investor relations page.

In 2022, 2023, and 2024 so far, demand for other drinks in the RTD category has declined in value while energy drinks have grown. However, and this is why the stocks are falling, 2024 has been a very slow year in energy drinks. Monster Ever said it was the slowest year besides a short flipping COVID and the GFC in 2008. Why? I think is a tough question to answer. Is the category losing share? Well, no, because look at the rest of beverages. They're still out pacing the rest of beverages and have been for the last three years. Is it the weight loss drugs? I know everyone, it's a little less popular right now, but you know, remember when everyone said that Ozempic was a category killer for a lot of stuff like this? I doubt it, honestly, because

energy drinks are embracing sugar-free due to Celsius. So if anything, they're lining up with that type of thing and reducing the craving. You know, I think the one idea that makes sense is the K-shaped recovery, where the lower part of the consumer is struggling. I think energy drinks, you know, they're big in convenience stores, and they play a bigger role among poor parts of the population. Monster has said that they think this is the cause. The dollar stores are also struggling, which kind of would line up with that thesis. And it would make sense, and I'm not going to share the chart, but Celsius is gaining more share of the category growth. And if it's a K-shape recovery, I think that makes a lot of sense because Celsius targets the wealthier part

of the energy drink category. Yeah, I think it was Monster this quarter on the conference call that came out and basically management said we've never seen an environment like this any time the only time that we've seen declines in volume were gfc and covid like you mentioned are they the leading recessionary indicators ryan i think they might be it's so bizarre what i mean like you said maybe it skews towards lower income um the products yeah i don't know if i've seen anything that states what their typical customer looks like but yeah it could be just general consumer weakness and discretionary categories we've seen that all throughout um A lot of the companies reported that this quarter, so K-shaped recovery is really the only one that, out of those answers that you have, makes sense for me.

It's not extra competition. Maybe for Monster and Red Bull, Celsius's rise has been a little bit of an inhibitor of growth, but the category, it's all slowing. Yeah. Oh, yeah. I think all this to say, this is why I was spending so much time on this is because we want to identify whether the slowdown is a Celsius problem or a short-term sector problem. And I think what I came away from and what I came, you know, why I'm positive about this category is because it looks like, from my sense, that this is just a macroeconomic issue

for the category. And it's not a long term problem for energy drinks or Celsius in particular. You know, we are still seeing a big transition to sugar free caffeinated seltzer, which is essentially what Celsius is. So you have the caffeine and the health focused stuff. It is just a cohort of the economy and a cohort of the customers that are struggling. I don't think people are going to stop drinking caffeine. I mean, I'm 100% confident in that. I don't think people will stop wanting a ready to drink product in a can with minimal calories with caffeine that can replace not only their coffee their tea but also their gatorades their sports drinks their orange juices and their sodas yeah all right what's great about celsius though is again we mentioned that they're taking

more and more share of that growth and i'll share this chart because it's hard to understand because it's almost like the second derivative of the category growth. If we look at their contribution to the dollar growth of the energy category, it went from 0.5% in 2019. So that means if... Yeah, this chart always confuses me. Okay. Let me just do it as an example, because I know the listeners are probably... It can be hard to wrap your head around without seeing the numbers. So let's say in 2019, if the category grew by $1,000, they would have contributed $5. It's essentially the incremental market share.

Yeah. So the incremental market share, if it's a group of dollars that were grown, and so far in 2024, they've contributed 46.5% of the dollar growth. So if there was $1,000 of new spend within the energy drink category, they would have been $465. In other words- So that's a huge difference. If Celsius did not exist and the category – in this case, they accounted for 46.5% of the new category dollar growth. If Celsius did not exist, the category would have only grown by – what is it? 53% or it would have grown by more, but it would have been made up by competitors.

No, no, no. Yeah. Well, 53% is not the right number. It's more of the – like because – Sorry. Yeah, yeah. $530. of the $1,000. I know it's confusing, but essentially they went from basically none

of the category gains from a dollar perspective to half in 2024 so far. And we've seen their share across physical retail plus online, which is their MULO plus from Circona, which is just third-party estimates because there's a difference between, and this is important, we'll get to it, the sell-in to the distribution and then the sell-through to the consumers, which is hard to track. But someone like Circona, these third-party analysts work really hard to do so. So you have this physical retail and online, such as Amazon, and it's looked great from a market share perspective. They now have around 12% market share and are the clear number three player in the space.

And again, this is due to more people wanting sugar-free energy drinks that have a health twist. You know, they got their B vitamins, their green tea extract. I'm not sure exactly how healthy they are, but people think they are. And the brand perception of Monster and Red Bull, where again, women actually drink Celsius and the focus on health and wellness is important. Will the growth continue, though? I think we're going to talk about that for the rest of the episode, Ryan.

I have a question for you right now. Do you know what Celsius' market cap is today? Today? Don't look. Well, I looked last night, so I can probably bank on it, like $7.3 billion. It says 7.3, 7. So, yeah. So it's – I don't know. It surprised me. It feels very low. It is the leader in new dollars spent on energy drinks, right? Is that kind of the way to think of that chart you shared?

Right now, yeah. Well, they're not the majority yet, but 46.5%, pretty close to half. They might be the largest contributor though. of the engine wheel yeah yeah especially because we'll have a chart below monsters actually uh lost at least in the united states and again this is probably this is definitely just the united states so international red bull monsters still dominate uh but yeah look they they the last six years in the united states have been astoundingly successful for celsius this i know this isn't that helpful to your analysis but for any of our international listeners that don't know the celsius brand this is extremely popular in the states especially with younger

generations wouldn't you agree we were having a conversation with your friend the other day about how he only drinks celsius has a fridge full of celsius it's i know this is anecdotal evidence but yeah he's not the only one there's also a few copycats that he had uh but i think what's interesting is that he associated the Celsius brand with all of those sugar-free ones that are trying to copy them. And that's probably a good thing for them. And one note that I will make another fact before we move on to kind of the profitability and the income statement here. Celsius claims, I think it makes sense, they can probably track this, that they've introduced, or sorry, 75% of the customers they get are new energy drink customers. So they're not actually,

it's more greenfield and that might change you know as they're creeping up on the market share with red bull and monster but they've expanded the category uh not just stolen stuff from monster and red bull i believe it it feels more when you look at the energy drink aisle it feels less intimidating you don't not necessarily like it doesn't feel like as big of a commitment if i drink a whole can of monster i'm probably going to be up all night and it feels like uh what's this going to do to me i'm not really sure if you're if you've never had a can of monster or can of red bull for some reason you look at celsius and you think it seems more palatable maybe it's the simple can design maybe it's that it's associated with fitness but yeah that's true

it's perception because they have the same amount of caffeine i think but there is and this is what i called earlier i'll repeat it there is a little bit of a stink with the monster ones where you think, oh, it's going to taste gross, loaded with sugar, probably super unhealthy, and I'm going to get wired and crash. Yeah. This passes the Peter Lynch test with flying killers. Yeah, exactly. Exactly. I was thinking throughout this episode, he would definitely own this thing, especially with the market share taker plus anecdotal evidence and a track record of national expansion. Yeah, absolutely. Okay. Let's talk the unit economics. What profit margins or cashflow margins should we expect as this matures?

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slash chitchat. To get 15% off any paid plan today, the link is in the show notes. Yeah, that's the question we want to answer is like, okay, in my estimates for the next three to five years, like what operating margin should we expect? Should they be radically different than today? Or are they going to be about the same? Or could they go down? So they're pretty easy to understand with Celsius, you have cost of revenue is the variable cost. They this is from their annual report. So I make sure to always check this because I don't know if it's famous, but it's famous among us from the podcast is when we looked at Peloton. And they were stuffing a lot of cost of revenue and selling general and administrative expenses. You always just want

to check that. Usually it's fine, but there's some companies that can be sneaky. But yeah, this is raw materials, packing fees, warehousing expenses, and the majority of the costs are the raw materials. So essentially the cans and what's inside the cans. Now Celsius's gross margin is now 50%. It has gotten closer to monsters in the last five years, and I would not expect margins to climb much further from here. Maybe we can slot in 55% as a ceiling, something like that. But historically, before they got any sort of scale, the gap was much wider between Monster and Celsius. Now, as Celsius has reached a lot more maturity, it's pretty much closed. I don't think we're going to get much leverage from there. The second big expense category is selling general

and administrative expenses. You have marketing and corporate overhead. From the definition, It's really all things associated with sponsorships, marketing, and look, your payroll costs, your building costs, your corporate employees, everything looks pretty much in place here. SGA in expense was $413 million over the last 12 months, or 28% of revenue. It was 41% of revenue in 2020. I expect to see slight leverage here with this segment as we scale, but probably not too much because they've seen a lot of it already. and this is the type of company where marketing is almost a cost of revenue because you have to

keep reinvigorating that brand each and every year. And that's really the basic unit economics that get us down to operating income. Celsius has a growth operating margin right now of 22.4%. Monster has an operating margin of 28%. So, you know, not too far away. Historically, Monster actually had a higher profit margin of well above 30%. I don't know if I'd bank on Celsius getting there, but who knows? You know, it's possible given that gross margin. And given the similarities of the business, I think banking on about a 25% operating margin for Celsius makes a lot of sense. And I'll have some charts comparing the two in the newsletter. Last note, before I let you talk, Ryan, free cash flow conversion has been fairly poor. I expect this to close over time

because inventory turnover should be pretty high and it should normalize a little bit more as they scale, but it is definitely something to watch out for. Cashflow conversion matters. And if it isn't converting as fast as we like, returns will suffer over the long haul. I want cash return to shareholders, not earning stuck in working capital.

Something that I think is not going to be an issue for them, but definitely watch out for because it hasn't been as consistent as I thought it would be. yeah it's kind of a double-edged sword here because when you're growing so fast you have to invest more in the cans and working capital so right you don't want a zen situation that's happening right now you'd much rather have a little bit more inventory while you're kind of hitting that s curve and 50 growth as growth slows i imagine free cash flow conversion

will become higher with monsters operating margins i believe it has had to do with their international expansion and the lower price points on some of their energy drinks in those categories question for you do you well first of all i'll say good summary on the unit economics i think they're fairly straightforward per celsius the biggest issue would be if there was some sort of a huge switch in demand slowing growth is not the end of the world i mean it gets the stock cut in half but it's not the end of the world in terms of like cash flow dynamics if they had for some reason demand fell off a cliff we almost saw this with like the whole someone had too many energy drinks and they passed or they i think they passed away um and it just so happened that

they were drinking celsius and there was some articles that came out that were kind of like i don't want to say hit pieces but they were against celsius um if something like that were to affect demand then they'd be stuck with all this inventory they can't sell potentially then cashflow really starts to get hurt. But if demand just slows a little bit, I wouldn't be too worried. My question to you, who do you think has more room for price increases, Celsius or Monster? I would like to see the comparisons at stores. I know I did a comparison on Amazon. I was kind of looking at a price per ounce, but it's also not apples to apples because Monster usually has bigger cans. I would say Celsius slightly, but they both have solid pricing power. I don't think

Celsius is going to be able to sell twice. It's not going to be like an iPhone versus a super cheap Android where you can sell for $1,200 versus $300. I think it's going to be more like, okay, Celsius might be $2.50 for a can. Another product is $2. Yeah, I'll just go with Celsius, But if it was at $5, I think people would really debate that. So I don't think they have unlimited pricing power, but I think Celsius is slightly better. Yeah, I think that makes sense. Another way I could phrase this question for you, who do you think has a more affluent customer base? Well, it's Celsius.

Okay. Yeah. Have you seen any sort of like demographic stuff about it? No, they just, the management talks about it. And then that kind of matches up what you see in the real world. Okay. So potentially there's more room for operating leverage here if you're Celsius. Maybe.

Yeah. But I would watch that gross margin. It has ticked up. I'm not going to share the chart, but it's gone from like 38% to 50%. Just keep watching that because that's an indicator of how much they can pass on their input cost to customers. Okay. Let's talk about the Pepsi deal. I think about a year and a half ago, they signed a big deal with Pepsi and Pepsi also got a chunk

of the company as well. Talk about what this is and the importance of it for Celsius going forward. Yeah. So there was approximately two years ago and Pepsi and Celsius entered a large partnership. I'll just say what each side got. Celsius got $500 million in cash. They also got onto Pepsi's distribution network in the United States. And Pepsi now manages, I think, wrote all, it's not all, but a lot of the distribution, which has likely contributed to better and more stable gross margins for Celsius. So positive for them. And also Pepsi's huge. You're going to get into that grocery shelf space and Pepsi's going to negotiate for you with all of their leverage that they have at the grocery stores and convenience stores. And then third, they have

opportunities to hop on the Pepsi distribution network internationally where Pepsi gets first dibs on any new markets. And then what did Pepsi get? They got 1.5 million shares of series A preferred stock. The preferred stock pays a 5% annual dividend, which was a $27.5 million payout in 2023. And then the conversion ratio is one to 15 for the common stock. So it's equivalent to about 22 million shares. Right now there's 233.3 million shares outstanding. So about a 9.4% potential ownership by my math, maybe a little different if I didn't do the total. Either way, the dilution would be decent, but not crazy. And it's not going to impact everything by too much if all goes well over the long haul.

What do you think of that 5% annual dividend? Yeah, it makes sense. Fine. Do you think, I don't know, would you be frustrated as a, if you were a Celsius shareholder and you saw Pepsi get that, would you be frustrated? No, because it's well, $27.5 million a year is well worth. having pepsi i mean it's probably already been worth it for 10 years given the growth they had after that just because you're going to get the shelf space and you're going to have equivalent shelf space to red bull and monster now and play on the same footing they've gone up from when

you're just competing to get you know four units at a convenience store uh versus a whole cooler or a fridge whatever they are okay so you like the deal you think it's quite helpful It makes a lot of sense for both sides. Celsius is taking market share from PepsiCo products. PepsiCo, for example, owns Rockstar, which is a dying energy drink brand. There's also Gatorade that Celsius is taking share from, and this is really a hedge against that. They want exposure, similar to how Coca-Cola took a 20% stake in Monster, and Monster hopped on the Coca-Cola distribution network. Celsius would like better distributions in stores, which leads to revenue growth, and with those union economics, leads to more profitability. Now, what happened, and another reason why the stock is down, is a problem materialized this year with the deal. Pepsi overbought, or maybe Celsius oversold, inventory into the distribution system in late 2023. This is why revenue growth accelerated in late 2023. I think it went up to like 100%. from like it had been going down from your for years at a percentage basis and it went up from

like 80 to 100 and people thought wow like celsius would just even had almost a billion dollars in revenue going crazy here but uh combined with the category pressures of 2024 revenue growth has decelerated to 23.4 last quarter and may get worse this quarter on a conference call or an investor conference this year, the CEO, or I think this was the CEO though, but it was the CEO at another conference talking about this, said that Pepsi is about 55% of their purchases in North America. And if you look at their total growth this year, not the Pepsi, but Celsius's total growth this year, quarter to date, they're up about 10%. I think that might be, don't know if that's their revenue or the sell-through data. And when I mean sell-through, I mean the sell-through data to

consumers because Celsius recognizes remedy when it sells through to the sells in to the distribution system, but consumers don't buy it until it's sold through to them. So there's a little bit of a mismatch on that. And they also claimed in the investor conference that their market share is up close to a point or one percentage point year over year. So one would assume that their purchases would line up with that growth. Unfortunately, though, that is not necessarily what has happened. and they said that they purchased about $100 million to $120 million less in Q3 this year versus Q3 of last year. Confusing. It's kind of hard to piece together. I mean, I don't think they know the full story yet, but essentially Pepsi is buying less right now to get that

inventory levels down. That's going to make Celsius's revenue look worse, even though consumer demand is still growing. And you can see this with the revenue estimates chart. Nice little chart, I should say. I don't know when this was released, probably a little while ago, but from our friends at FinChat, which you should go check out with our link in the show notes. I'm going to share the screen. The estimates for Celsius's Q3 here is way off the trend and way below. So in Q3 of 2023, they had $385 million in revenue. The consensus net submit for Q3 of 2024 is $305 million, even though the company is gaining market share. Does that make sense, Ryan? And does that estimate, I know we're not in the weeds like these banking analysts,

but does that estimate seem too low to you? I would probably lean on the side of the analysts being closer. But look how wide that skew is. Some are estimating like $400 million. Let me pull up another chart, Brett, and I will say that feature is a little old, but still, yes, very useful feature. The revisions in revenue estimates. Do they beat? Yeah, I'm not sure. I usually try not to pay attention to that, but I guess it might be helpful specifically in this case. So this is what analysts were expecting over time for, in this case, 2024. so right they were expecting looks like two point what is this two point five two point five

and now it has over the last what is this six months roughly since may it's just fallen off a cliff in terms of the expectations for revenue it's gone from what they were at one point consensus analyst estimates we're projecting 2.5 little under 2.5 billion in revenue keep in mind they're currently at 1.3 1.4 1.4 so almost double from here it's since come down to roughly 1.7 billion expected yeah yeah and that's because of this pepsi deal if we look at okay according to management they purchased pepsi purchased around 120 million dollars less this year my guess is Maybe the normalization is you divide that in half where they bought a little bit too much last year, buying a little bit too little this year, and then we might add some growth

on top of that. So you get $60 million, I'd say 10% growth. That brings us to $371 million if that consensus figure is correct. Personally, that feels a little low. You know, they had $385 million in Q3 of 2023. I would think it should be higher. but hey who knows who knows and either way this is going to be an ugly looking quarter and one of the keys for any investor in celsius is looking for this normalization over the long

term i think the biggest thing here is is this a demand issue yeah because if it's not a demand issue people will forget this ever happened in a year if this is concerns over demand then it's maybe a much much bigger issue and this is only the tip of the iceberg yeah i agree but i i definitely skew on the side of this was a supply mix-up not a demand issue i think so yeah and just listening to what they said it makes sense pepsi was trying to catch up with the 100 growth celsius was putting in and they bought a little bit too much and now with their they want to optimize cash flow so they don't want to have too much inventory sitting with them they're going to normalize this and

if you look at the market share data circana is not like in celsius's pocket so if that's a little looking fine then we're kind of alternative data skeptics yeah but that's it's i mean i think this one is one that's pretty trackable it's been people use it across the industry there's tracking scanner data at convenience stores and grocery stores it makes a lot of sense yeah let's talk international expansion what has happened here and i guess getting to the punchline here if you will why has the international expansion been so slow and do you think it'll change yeah that's this is a big question investors have really gotten nervous about this or at least i think they have over the last few years revenue outside of north

America is still under $70 million in the last 12 months. So under 10% of overall sales, well under 10% of overall sales. And I think this is explainable and not an issue yet. Celsius decided to focus on North America when it was smaller and quote unquote, win this market before looking elsewhere. I like the focus. You don't want to spread yourself too thin when you're smaller, especially when North America is such a big market for energy drinks. I mean, why go after Europe when you're not going to have any focus there? I mean, how big is your team going to be when you're a tiny company, like 10 people in Europe? It just doesn't make any sense. Now, given their size, given their balance sheet, given their profitability, given the relationship

with Pepsi and the relationship they're going to have with other distributors, they can run the Celsius playbook in new countries. I think 2025 is a big year, a big test for international expansion. They have made deals for international distribution in Australia, New Zealand, the United Kingdom, Canada, and France. If they can execute the same strategy in these markets as they did in the US, there's a chance for international revenue to grow to a much larger portion of sales. All these markets combined probably have similar wealth populations to the United States. So that could double the market opportunity, I would say. Maybe you'd have to include all of Western Europe. But still, I think, again, a huge opportunity if they can execute with

the same playbook. I think that's really it. Yeah, 2025, I think, okay, from an investor perspective, 2025 should tell you a lot about what revenue growth should be from 2026 to 2028. Because if 2025 momentum picks up internationally, and they go from like 1% market share in the united kingdom to three percent then you i think that doesn't confirm but it makes it much more likelier that they're going to go from 10 to say 15 or something like that yeah now do you have any confidence in the celsius brand going global like that's kind of the thesis i laid out of what they're probably going to try to do what do you think the likelihood of the success there heads up folks interest rates are falling but you can still lock in a six percent or higher

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I think they can do it. I think they can have international success. A big reason for that is because you get a lot of Americans traveling abroad. You get a lot of places where they've already had success that are buyers there, that are moving there whatever it is that are there's some footprint of the brand already and you have people in those markets that either travel to the u.s they have it they know of the brand and i've seen this constantly on social media and stuff like that finally able to get celsius at my store from someone in canada or someone in the uk and it's like they've been

waiting for it now maybe those i'm a part of fintwit so maybe that's just shareholders that are just eager to try it but i do think having brand success in the states especially for a consumer product like this where it's two to three dollar purchases can translate everywhere yeah if monster can translate everywhere why can't celsius monster is you would maybe argue more unique american style brand with kind of the extreme sports like they're not doing those as much i don't think in france where i why won't maybe to invert it why won't a sugar-free fitness focused product work in other markets i don't see why not i feel like this is perfect for australia without ever having been to australia it just seems like fitness community

warm like they drink too much tea in the united kingdom it's too cold up there yeah australia it's warm, it's refreshing. It could make sense. It's making a lot of sense. Let's get that market going. Do you trust management? I think Fieldy has a fantastic track record. Well, I don't think so. He does. They were on the verge of bankruptcy when he joined. He was a part of the team that saved them. Remember, he said that they lost the Costco deal. That was 60% of their revenue. They were thinking they were going to lose their jobs in six months because the company was going to fold and they pulled what i call it a miracle but they had the odds stacked against them he seems very sharp focused on the right things in the interviews he talks about and if we look at just

the results they have stayed focused on building the brand of fitness health sugar-free for a long time and are not stopping they've also been very good at not money uh wasting money on acquisitions at least to my knowledge making a deal with pepsico is smart and should not lead to too much delusion so the one deal they made was with one of their biggest competitors and making a friend out of an enemy that they're stealing market share from with a lot more capital and a lot more uh firepower and power just power in general i don't know if it was an acquisition but i know at one point they were trying to sell like food like protein bars that kind of thing in europe is specifically yeah well good thing they're not doing that anymore i think the gq

interview was good i think there's a lot on his philosophy and how he runs the business i came away thinking he's not a consultant um mouthpiece you know and that's good doesn't mean they're gonna succeed from here but the execution has been phenomenal and i don't see any reason why i shouldn't trust them like why should i doubt them right now after he's 10 100 x revenue in a decade i don't know what's the insider ownership look like he's at about one and a half percent i guess i don't have the table in front of me we also have like pepsi you know is is technically a part of that there's an investment fund that made a big investment in them um i think back when they were about to go bankrupt and they still have an ownership stake lee ka shing i don't know

who that is but i think that's uh yeah i'm not sure you'd have to look at the footnote there but someone again field he owns about one and a half percent there's an investment fund that has a stake pretty standard besides that all right let's talk competitors any chance this is just a fad and then do you worry at all about copycats i mean i worry about both those things but that's why we do the research on this episode to try to mitigate or maybe look and see if we're being too worried about them because how could you not be worried when you've seen the lacroix boom and bust and you've seen the what was the biggest one the white cloth boom and bust now both those products are still in use but different categories i will say and different categories but i would say

similar one big differentiator these have caffeine yeah that's true that's true but which is addictive. I still think those are examples of where people should be cautious about extrapolating revenue growth forever. Well, they've taken a share from everyone else. They're a $1.5 billion revenue business, basically solely in the United States. And given the great unit economics we talked about, capitalism is doing its thing. Competitors are emerging on a regular basis. There are a lot of potential profits to be had if you can steal them back from Celsius. You have influencer-backed brands, other new healthy energy upstarts. I always put those in quotes because it's really just caffeine and seltzer water. And then competition from Red

Bull and Monster trying to hit on the sugar-free category. I am not worried about Red Bull and Monster because they can say like sugar-free Red Bull or Monster sugar-free or that new thing they have with Monster called Rain. Monster also owns Bang Energy, which was popular, I think maybe five to seven years ago, something like that. And that's been struggling a ton. And I just think the perception of those brands is not going to be fixed. And they don't really, this is the, it's not innovators dilemma because it's energy drinks, but it's counter, the counter positioning is the right way to say it, where Red Bull and Monster can't destroy their existing brand to go after this niche. And it's a growing part of the energy drink niche. And it's going to be

tough for them. But what about these upstarts like Alani New, which is getting a lot of share, I think it has about 3% share. I have a chart or a screenshot here where it's getting sold on Amazon looks very similar to the branding of a Celsius, it says, and I'll just have the title here a lot of new dream float sugar free low calorie 200 milligrams of caffeine pre workout performance with antioxidants biotin b vitamins zero sugar 10 calories 12 fluid ounces and it's slightly more than a celsius but about the same price celsius says uh functional essential energy b that is blah blah blah blah blah it's pretty much copycat um and then i want to share this one which i think is interesting it is the year to date market share for all the energy drink brands

What's nice about Celsius is that they just put all their competitors on their investor relations slides. They don't have to do this and pay an investment bank a ton of money, which I wouldn't do it anyways. But Celsius has gained $425 million year to date versus I think the year before. Monsters actually lost dollars spent. Bang has lost dollars spent. But if you look at these ones like Alani New and C4, which I guess C4 has kind of reinvigorated

its brand. Alani New has gained $122 million and has 3% share. So I think they're definitely taking potential Celsius customers. Does that make sense, Ryan? I know it's a lot of numbers, a little confusing, but it's basically a copycat product and they have 3% share. Yeah. Probably nipping at the heels of Celsius. Yes. I'd say C4 is probably in the same boat where especially Celsius now is kind of more of a broad brand and that it's not – people don't necessarily think about it as purely like the fitness pre-workout kind of drink.

But C4 looks like they're at 3.3% share and they gained $104 million. That's probably targeting the fitness enthusiasts as well at a lot of those gyms and stuff like that. So C4 is, I think, I'm not sure many women drink that one though. No, probably not. I would assume. A lot of guys. Yeah. The old formula used to be dangerous as a side note.

Anyway, yeah. Alani New is concerning. Question for you. How much do you think this weighs on the stock? Alani New's success. i i imagine a lot of people see that and they're like i can't invest because there's going to be more of these that come along yeah i think that's what we should put for a quote for the tweet a lot he knew his is a concern that's just kind of a funny little quote like i don't know i've been

not a fin twit has heard of that brand or 90 of them haven't um but it is a concern i think the amazon marketplace if you look at those little screenshots i'll have in the newsletter there they look equivalent there's a lot of sponsored listings uh if you search energy drink you get dozens of products that look very similar a lot of them are trying to copy celsius i don't know how they separate themselves as like introducing themselves to the consumer on amazon but the good thing is that this is a small part of the market i do believe they have a brand build up and can fend off competitors due to the deal with pepsi because distribution at stores matters a lot They're going to show up front and center for the shoppers, and Alani New does not have this luxury.

If I go to the grocery store, I'm confident Celsius is going to be right there. I've never seen Alani New at the store. I have. What about you? You have? Yeah. I've been attest by it. I know.

It looks similar. They just copy Celsius. Yeah? Yeah? I don't know. They have the same healthy, less intimidating vibe. Yeah. Now, that is a concern, and we do sound a little bit negative on this competitive set.

It's definitely probably the biggest negative I've seen when researching the, you know, the episode, like the macro stuff, I don't really think is a problem. I don't think that Pepsi, the Pepsi thing is going to work themselves out. But haven't there already been a lot of fitness and health energy drink copycats for the last five years, right? This company has been around and they still have over 10% market share that is growing. You know, you could have probably made this same argument back when Monster got started if Red Bull was a public company and said, well, look, they're stealing market share. But the category itself is growing and, you know, not one company is going to dominate the whole thing.

My discussion question, though, we're at about a little over 10% market share right now with Celsius. What market share do you think they can achieve in the United States and what confidence level would you put on that? i think they can like i think it's possible for them to achieve 30 if they get wait sorry in the united states specifically in the united states specifically with market share yeah right now it's at 12 yeah i'll probably still go 30 i mean if they if they can retain that 40 40 40 to 50 of new dollars spent they're going to get there that is true over a long enough time frame Yeah, I would not underestimate – I think they're going to have a lot of success in the United States. I mean, they already have, but I think they are going to continue to have success in the United States. international it's different question i'm optimistic that they can and i probably lean

towards them succeeding more so especially if they commit the resources to to marketing the same way they did here yeah i really think they can get to the red bull uh monster levels yeah 30 they would be stealing a lot of market share from them unless you think it's going to be only those three and then 10 and less for everyone else no i i would not be surprised if monster and red bull lost market share lost a little bit in the states yeah yeah no i i agree with you i think i would have if we i know fairly high confidence isn't like a precise metric but i would have fairly high confidence they can get to something like 20%. 30%, I think they can get there, but I don't know if I would say I'm betting big on that happening. And good thing is that's

pretty far away from here. All right. Let's talk valuation. Is the stock cheap? Obviously, the stock is down nearly 70%. So is it cheap? What are your financial estimates? And will you be buying shares? It's definitely cheaper from a price perspective. Relatively speaking. Yeah, relatively speaking. The two numbers I want to hit on

are what I think revenue growth will be for the next three years and then what margins can be like from an operating margin perspective. It shouldn't, you know, that dividend payment and then any interest expense slash interest income

shouldn't impact it too much. So I think EBIT margin, operating margin should convert over time to cash flow. My estimates, I would say what I have fairly good confidence in is growing sales by about 20% annually from 2024 to 2027. So what I mean by that is like from the end of the year 2024 through 2027, and then maintaining a 25% operating margin. The reason is, is the energy drink category should continue to grow over the long term. The Celsius brand is taking share within that category. And in international expansion, they have a low hurdle

to gain share. Like even if, as you mentioned, replicating the playbook to perfection, even if they don't succeed as well internationally as they did in the United States, they are way below any sort of success level right now. So I think that can lead to, yeah, 20% annual revenue growth. I think we also shouldn't remember, or sorry, mixing that up. We also shouldn't forget the preferred shares. So I'm adding that to the fully diluted share count. And we get a market cap as of this recording of about $8.2 billion at the current share price. And in my assumptions, I kept the share count flat from 2024 to 2027. I assume they're going to be positive on a free cash flow basis. So I'm just going to assume that they're going to repurchase the stock

to offset dilution. It's just part of the model. Not sure exactly what they're actually going to do. Under these assumptions, the stock trades at these price to operating income levels from 2024 to 2027. 24.9, 18.2 in 2025, 15.2 in 2026, and 12.7 in 2027. Under those estimates, I think it looks fairly cheap. So you're saying if revenue over the next three or four years grows 20% a year, operating margins are at 25%. Yeah, they're over 22% now. It's trading at 13 times roughly 2027's operating income. Yeah, with the stock down, it's actually 12.5% priced operating income on 2027.

Yeah, here's the question. Is that cheap though? Is that cheap? I think that's reasonably valued Forecasting 20% growth I don't know if I'd call it cheap yet Alright, last question though And this is what I call the actionable stuff from the episode

I left this one blank because I didn't want you to be spoiled But I guess we're going to decide whether I'm going to purchase shares Here's what I'll ask for you because i kind of want to break from talking it talked a lot this episode are you more bullish or bearish after this research i'm more optimistic on the durability of the brand i would have thought just purely because it was a 70 drawdown that the stock would be a little cheaper yeah that's a good point i mean it's still baking in basically 20 growth annually

yeah i wouldn't be surprised if 20 growth happens the stock trades are like 20 above 25 times earnings but again you're banking on that from a multiple expansion perspective so that could lead to some i guess i don't have the numbers in front of me i think that is not necessarily all priced in right now um but yeah it's not like okay it's going to trade at five times earnings in a few years wow that's incredibly cheap and it deserves to trade at 20 times earnings you know 13 times earnings in four years is not something where you go oh my god this is dirt cheap yeah are you gonna buy shares i'm undecided so that means no i'm not it's gonna be real high on the watch list Yeah. You need another 70% drawdown. I know. It's very close. And when I get to this point,

I get undecided. I have to just remind myself that there's a lot of stocks out there. And if you're undecided, you're probably undecided for a reason. And for me, it's a little bit on the competitive set and also a little bit on the valuation where I don't think it's as cheap as people think. Now, the stock could absolutely rip 50% next quarter if this pepsi situation is overrated and i might look like a fool but i think and these are the worst these are the cursed words out there another 20 to 30 percent down i think it looks quite attractive but if i compare this to my existing portfolio i don't think it's as cheap even considering 20 annual growth i know it's it it's hard to fathom that

after a 70% drawdown, valuation is still top of mind as a concern for us. But you still got to forecast pretty strong growth. And it was a lot easier when they were growing 100% year over year to think, oh, they could grow 20% annually. But 20% top line growth for a business this size is a lot. I agree. And I don't want to hear anything that anyone's, well, don't be thinking this. Well, the S&P is at 29 times earnings.

I don't care what the S&P is trading at. I really don't. I don't care that Celsius is trading at a cheaper multiple than the S&P 500. I care about what returns I'm going to get owning the stock. And I think the risk reward is pretty dang close to being a great opportunity, but not necessarily yet. All right. I think that's going to do it. What are some of the risks you're keeping an eye on?

Yeah. Here's a little sum things up for big takeaways. if you own the stock, if you're interested in it, I'd really keep an eye on the Pepsi situation. I'd keep an eye on market share stagnation. This summer, they haven't grown market share by that much. It's a short time period, but I definitely look for that to keep happening in the United States. That's going to be, if they can't gain any market share from here, that 20% annual revenue growth is going to be tough. And the third one is the category growth. There's been a slowdown this summer we'll see how long that happens and whether it's a permanent shift like it's not out

of the realm of possibilities that the energy drink category as a whole hit a little bit of a ceiling yeah that's fair hit maturity for the faster than people were thinking yeah and then as ryan mentioned alani knew a little bit of could be a problem yeah it honestly could all right i think that's going to do it. You want to take us out or you want me to? Yeah. I'm trying to think anything else for people to remember. Just remember we recorded this on September 25th, 2024. And also remember, we talked a lot of charts, a lot of numbers. That'll be in the newsletter. It's free, goes along with every episode. And yeah, why don't you take us out with the disclosure? All right. That is going to do it. Thank you all for tuning in. I will have

another stock specific episode coming out a week after this one. And I don't think I'm going to name the companies, but we're talking about two different types of grocers. One is one we've had a history with in a multi-bagger, I will say, a little foreshadowing there. But thank you all for tuning in. Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat stocks is not formal advice or a recommendation. Brett or I may buy, sell, or hold any of the stocks discussed on this podcast. Thanks again for listening to this episode and we'll see you next time.