Chit Chat Stocks - Celsius Holdings (CELH) | Not So Deep Dive

Episode Date: March 29, 2022

Celsius Holdings develops and markets functional drinks, more commonly known as energy drinks. The company is now in 135,000 stores in the US and they have a 2% market share in the energy category. Listen closely as Brad, Brett, and Ryan go through the history, financials, and future prospects of Celsius Holdings. Enjoy the show! This episode is brought to you by Knack Bags. Use our link and enter promo code “KnackChat” to get a $15 TSA approved lock with your purchase of a bag: knack-bags.pxf.io/4eMgNZ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Interested in more of Brad’s work? Find his Substack: https://stockmarketnerd.substack.com/ Contact us: [e-mail] Timestamps Company Background | (3:38) Industry | (7:55) Management & Ownership | (9:35) Valuation | (11:17) Earnings | (12:35) Balance Sheet | (14:09) Our Analysis | (15:28) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not So Deep Dive episode on Chitchat Money. And today, we're going to be talking Celsius Holdings. They are an energy drink company, and I'm going to let

Ryan introduce them. Personally, I have not heard or seen of this product before, but I got to ask Brad, who's joining us today. Brad or Ryan, have you tried the product, seen it before, her this company yeah no not not for me specifically but i am i see the word stevia in this in this introduction not to have any spoilers but i am a xevia fan which which is like a like a stevia sweetened soft drink type thing so i could see myself uh trying this in the near future but i have not yet i have seen this pretty much at like all stores now i'm i've i have like I don't know, phases of energy drink sometimes. Sometimes I'll replace coffee with real energy drinks. And I'm thinking about giving it a try. I was going to get one for today's show,

but I was running late to the office. So I'm minus my Celsius drink today. Yeah. And it's a little cold. It's not really energy drink season up in Seattle, but we're going to let Ryan introduce the company. But first we have to talk our sponsor for this episode. And that is Knack Bags. Knack Bags are a versatile backpack and expandable carry-on bag. And in fact, Ryan, you have tried them out before and you said you'd love it. It's a great way basically to become, he's showing it. We don't have video here, but he's showing it to both of us. It is a very sleek and expandable. So it can become a backpack, but then it expands in the middle and becomes a travel bag as well. It's very versatile.

I mean, Brad, you guys can see it, but there's like 20 pockets on this thing. I'm telling you it's uh it's it's very versatile and the the expandability is is quite uh quite the feature for traveling yep it's designed for professionals who need to function in convenience without looking like a student with its patented design knack is the first backpack that expands for more capacity when you need it the sleek exterior organized interior and professional appearance help you look your best at the office or out in the world if you want to use our code knack chat, which you can see the spelling in the show notes. You can get a free TSA approved lock to go with your purchase. Try it out. Head to knackbags.com. Brad, anything to add on this

knack bag here? I was just going to say, it just seems like backpack meets cargo shorts. So if you're one of those people who loves cargo shorts and a lot of pockets, but you get a lot of shit for wearing it, or I don't even know if I'm allowed to say that word, a lot of crud for wearing it. This could be right up your alley. That's right. You don't need to load up your pockets with stuff. You're like Ryan was saying, you're never going to have to keep stuff in your pockets anymore. There's plenty of space in the knack bag and it looks good at the same time. And I don't, I don't want to go too long on the sponsorship, but it does look very like professional. Like you could easily bring it to the office. I think I'm going to bring it when

we go to the Berkshire meeting. I think I'm going to pack most of my stuff in there. It's, it's really good. It's sleek. Yeah, it's perfect. All right, Ryan, do you want to introduce Celsius Holdings. Yeah. And so it's a pretty basic business. I guess they do really one thing. So Celsius develops markets and distributes a line of energy drinks. A lot of people use them as a fitness supplement. So I don't know if you guys, like, I don't know if this is your thing, but a lot of people have like bangs or rains are popular out here, like before a workout. It's not C4, only C4 if you're serious. It's like, yeah, I don't know. There's like a whole line of those, like, um, I guess caffeinated carbon, like can, uh, energy drinks that people

use before workouts. Um, but it's also just like a general energy drink. So I guess it's up to the customer how they want to, or when they want to drink it, but they do have a few different product lines. So they've got the Celsius original that comes in nine flavors. That's probably what most people are familiar with they've got celsius heat which is designed to be more intense i guess maybe that's just more caffeine um and then they have celsius stevia which stevia is like a natural sweetener and i'm not sure how different that is like product wise i'm not sure if that's like tastes more like a tea but they they've got those three different i guess lines and then they've got powder packs that that can be mixed in with water so kind of like uh what's that what's

company called Crystal Light. They've got a lot of those. So it's kind of like that. And then I think they have a protein bar line as well, but that's mostly in Europe. And I'll talk about that in my future growth opportunity. But they don't actually do their own manufacturing. They buy most of the ingredients, but they partner with a third-party co-packer, which fills the bottles and cans. So the co-packers have the actual expertise in the production process. And Celsius focuses more on just the formula and the sales process and marketing and kind of outsources that component of the business. And then Celsius products are now in 135,000 stores in the US. They have 2% market share of the energy category overall for

the last year, and they have 20% market share on Amazon. They are the second leading energy drink provider behind just Monster. They have surpassed Red Bull on Amazon. So they have really grown like a weed these last, I guess, few years. But as far as the history goes, I had a hard time piecing together all the information on the history. There isn't that much out there. And so I've kind of jumbled together what I can. And so there's a guy named Carl DeSantis who founded a vitamin company in 1976. He sold that for 1.8 billion in 2000. After selling it, he started a family office and like a family investment office. And then from that family office, he invested in a mom and pop energy drink company. Apparently one of his friends brought him this

six pack of energy drinks from a local Florida based shop. And he really liked it. And so I believe that company was called Elite FX at the time. And so he invested in it. And then shortly after they were elite, was acquired by Celsius Holdings, which I think was a public shell company based in Nevada. They went public that way. They were listed on the NASDAQ, but after three years of losses, they were delisted and forced to trade on the OTC markets. At that time, DeSantis replaced the CEO and extended another $3 million line of credit for basically further investment. DeSantis is pretty influential throughout the history of the company. I think he's still a major shareholder, but it's really interesting to see how he never wavered on his belief that

just basically this energy drain could be something really big. And eventually they began to gain traction. And in the last few years, they've really caught fire. So for reference, in 2016, Celsius had $22 million in revenue. This year they had more than 300 million. So more than a 10X in five years, it's really caught a lot of momentum. They are back trading on the NASDAQ. I think they relisted on there, I want to say like three or four years ago, but yeah, it's been, they call it a 12-year overnight success. So kind of a fascinating history there. Brett, do you want to talk about the industry and landscape? Yeah, I can. And yeah, they have been growing rapidly the last few years,

really, really hit their growth stride, but I'll hit the industry here. It's pretty, it's a basic industry it's very easy to understand the carbonated drink market is massive but really they're in at least for right now and you can argue they don't overlap fully with monster red bolt because they're going for you know more fitness type people and they're trying to acquire new customers to the energy drink market but global energy drink sales were in between 50 and 60 billion dollars in 2020 now that is global so celsius right now is really mainly just in the U.S. and they have a tiny business in the Nordics and they have a tiny licensing business in China. So really they're looking at the U.S. and it's a bit smaller than that, but still compared to

the size of Celsius, which we'll get into later in this episode, very large market opportunity. For reference, Monster Energy, I think they're the largest. I'm pretty sure they're the largest. They did $5.5 billion in sales last year. They may have some other products, but still there is a big opportunity here. Competitors include, and I included some non-energy drink companies because you're really going for what people are drinking, say, in the late morning, in the early afternoon, what their daily habit is for their drink. And that could be Coca-Cola, Pepsi, Dr. Pepper, Snapple, Monster Energy, Red Bull, Vitamin Water, Bang Energy, plenty of other stuff. I think it's a pretty good industry for hunting for stuff. It seems like one of those

where people form those habitual relationships with a product. But I'm sure we're going to talk about that more in the second half with our highlights and lowlights. Brad, do you want to hit the management and ownership of the company? Yep. So for management, the current CEO is John Fieldley. He was the CFO for six years and then got a promotion in 2018. He's been a former financial leader in various roles at firms that I wasn't super familiar with. The current CFO is Edwin Negron Carballo. I'm sorry if I pronounced that incorrectly. He was the CFO of a firm called Concurrent Manufacturing Solutions for five years, a controller at Energizer for five years, a senior consultant at KPMG. And then a lot of the VPs come from pretty parallel roles

with Rockstar and Monster. It didn't really look like they got promotions to make the leap. So just another good sign that these people who are very much so in the know on the industry made kind of horizontal moves, not promotions to work for Celsius. So I just wanted to point that out. But in terms of ownership, the early investor or who Ryan was talking about, Carl DeSantis, he still owns 26% of the company. There are three other investors. One of them's in Hong Kong, one of them's in New York, one of them's in LA. There are three institutions essentially that own another 22% of the company. John Fieldley owns 1.6% with all executives and directors owning about 13%. And yeah, I think that's a good place to leave off.

All right. Yeah. And I would note that the, I only saw this because I Google searched Celsius Holdings fraud, which I like to do just in case there's anyone suing the company or something like that. And the guy in the one MDB Goldman Sachs scandal actually owns like 10 million share, $10 million worth of the stock. I don't think that's like a red flag or anything, but it was a bit strange. I was like, all right, I hope he's not actually associated with the company. But let me hit valuation here. Market cap is $4.4 billion. Ticker is CELH. Now, I usually go price to sales, price to earnings here. But I really think for this company specifically, price to gross profit is probably the most, or at least the best metric for valuing them at this

moment. Now, price to gross profit is just taking the market cap divided by the trailing gross profit they generate. If you want to learn what gross profit is, I book it up on Investopedia. it's pretty easy to understand, but their price to gross profit is 34. So pretty expensive. And if you want to look at a more mature company in the industry, Monster Energy converts approximately half of their gross profit to EBIT. So if you want to value and think Celsius can get to that level of converting gross profit to EBIT, you would say that they're maybe trading at 70 times their normalized EBIT right now. So again, expensive looking valuation, but like Ryan was saying, he's going to talk about in the earnings here, they are growing quite quickly.

Also watch the share count. It's gone from 20 million to 75 million since 2016. So you're going to want to track revenue per share, gross profit per share, because they're using their stock and they're using common stock and equity awards to finance their growth, which isn't a bad thing, but it's just something you have to track. All right, Ryan, do you want to hit earnings? Yeah, I'll just try to touch on only a few metrics, but they have full year revenue, for this year was $314 million. That was up 140% year over year. They have 41% gross margins. And then like Brett sort of mentioned there, Monster converts about half that. So you would assume that if gross margins were at 41%, in sort of a best case scenario, I think Celsius could get to

about 20% EBIT margins. They do report an adjusted EBITDA margin of just over 10%, But they had negative $96 million in operating cash flow for 2021 due to them basically increasing their inventory to try to mitigate supply chain problems. But obviously, if they increase inventory, that's reducing their – that's not cash. So their cash flow looks pretty poor for the year. Over time, cash flow should start to trend closer to that EBITDA number unless I'm missing something that they maybe took out of that EBITDA number. And then another highlight from the quarter, I guess I already mentioned this, but 20% market share of the energy drink category on Amazon. So they surpassed Red Bull, second behind only Monster. And I think they're about, I want to say four percentage points away from catching Monster. But I guess other maybe notable things, almost all the growth is coming from North America. They're seeing a little bit of growth in the Nordics, but it's still sort of nascent in that market. All right, Brad, do you want to hit balance sheet? Yep. So the company only has about $16 million in cash on hand, but that has a lot to do with

the inventory build that Ryan just referred to. And it also has another $38 million in net receivables. So about $250 million in total liquid assets. And considering the fact that it's essentially financed its growth again through equity, the balance sheet is pretty darn clean, aside from the fact that shareholder equity keeps exploding higher, but it looks to be slowing down and it was profitable in 2020, not in 2021. GNA and sales and marketing both more than doubled year over year. So it has shown that ability to be profitable, but not consistently, but always nice to see that it has shown that ability. Yeah. And they're growing so fast where it's almost like it would be very hard for them to even be profitable just because that pace of growth

from how the marketing is so much right now, and it's going to finance a lot of that growth in the future. For someone that's growing, if they were growing a little slower, I'm sure they would be profitable. But I think people should note that, like Ryan was mentioning, the margins down here aren't extremely high. So like a sales multiple or anything like that. I guess we have nothing else on the first half here. Let's hit an ad break, and then we're going to get more of our opinions what we like dislike about celsius holdings cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song

from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply all right welcome back next up we have anecdotal evidence i think this one could be a fun one but i'm seeing in everyone's notes here that they haven't really tried it maybe ryan has tried it but brad any thoughts maybe what are your thoughts when you see the can because i know that's important for like consumers you see the can versus everything else in the convenience store? Yeah. If I wanted an energy drink, which I never have, but in a world where I would want an energy drink and that to be something other

than black coffee, I would go for Celsius 100 times out of 100 over Red Bull, over Monster, over all of these other ones, just because I read the ingredients list and that's extremely important to me. And the others read more like a science experiment. And this one reads a little bit more cleanly. And that just, that matters a lot to me. So no anecdotal evidence yet, but never say never, I guess. I'm not really their target customer, but it seems like they're doing incredibly well. So that doesn't matter. Yeah. I would note that they're actually getting sued by someone. I read this in their 10K. They're getting sued by someone for claiming they have no preservatives, but they're using citric acid, which is a preservative,

but Celsius is defending it saying that citric acid is not used in Celsius cans as a preservative. It's used as like a flavor or something like that. Just an interesting lawyer stuff. Uh, but I, the ingredient list is a lot more palatable than, you know, Red Bull or Monster. And I'm sure the taste from what people are saying is a lot better to Ryan and the anecdotal evidence for us. I have not tried it. I do actually, I am sort of that crowd of, uh, like pre-workout energy drinks sometimes.

Um, especially if I'm like groggy or tired or whatever. So I might try this later on and I'll report back, but I have noticed just kind of that it's just anecdotal evidence, but I've seen it a lot more throughout convenience stores. I've seen the label a lot and it's kind of, I'm getting a lot more, I'm seeing a lot more friends drink it as well. And caffeinated drinks tend to be pretty sticky. so once you kind of latch onto a brand you stick with it um and they're they're i mean it's you can see it in their sales results there's just a ton of momentum right now um and they seem to be right in that wave yeah and i'll just know their marketing i'm saying this in a positive note they they have some interesting marketing like they say that it provides functional energy which

to me like sounds kind of like a bunch of nonsense but it's i think that's pretty smart advertising because people are like, Ooh, functional energy. Like, what is this? Oh, backed by science. You know, that stuff seems to work really well compared to like, you know, maybe a Red Bull or a monster. The connotation with that is more like, I don't even know why it had this connotation, but it's more like grimy or like, kind of like, I don't know, but the Celsius, the way they market it, it really fits with how they're trying to go after that target customer. It like public perception seems to be that it's healthier energy than what you get with maybe some of the other energy drink providers like Monster or Rockstar or whatever, all those. Yeah, that does make sense.

All right, let's move to future growth opportunities. Brad, what do you got for us? Okay, before I say this, it's carbonated, right? These drinks. i think they have a line that i i saw that you put this in i'm going to double check because i don't think it it might not be okay well it says it says it is carbonated on on google but um there could be already a line that exists so if there is then i apologize to our listeners who are more knowledgeable in this company than i am uh but um i i i run pretty much every day and i like to have

a drink with me and i get that for like a pre-workout of a fizzy drink or bubble drink is fine but when you're actually like working out i don't know if bubbles are are the best thing so i could i could see them like creating or having already created because i don't know um but a gatorade 2.0 where again it just stands out in the in this field of ingredient lists that are very scary to read and and and is much cleaner and is much more invitable or inviting i should say that inviteable is not a word i don't think but i'm struggling with words today so i'll stop there but uh gatorade 2.0 is where i was going all right that's a good idea it says uh says here celsius originals our initial product line is currently offered in various flavors which are

carbonated and non-carbonated so i think they do offer it so uh it looks like they've already heeded your words there brad so present growth opportunities yes i mean it still is because i think people have that thought that it's not you know i'm sure a lot of people thought like you were, Brad. And if you're, okay, the sports drink market combined with the energy drink market is a lot larger TAM. So, I mean, that's all gravy for him, I think. Yeah. My future growth opportunity, I put here a better investor relations site. It is archaic and I had a hard time navigating. That's not my real one, but just a note to any maybe IR people that are potentially listening from there, feel free to modernize that website. My other future growth opportunity is international

expansion. So in 2019, they acquired a company called Funk Food, which was a distributor of beverage supplements and protein bars in Finland, Sweden, and Norway. Funk Foods owns a few brands over there, including Fast, Fit Farm, and Coco V. But I think they've basically used the acquisition to expand the Celsius brand as well. And so they said that they're seeing market share gains in Sweden, but still growth is negligible compared to Celsius's overall top line. And it isn't growing that fast. It is growing, but just really isn't. They're not seeing quite the results they are here in North America. And then they also have a licensing royalty deal in China. They say this is one of the fastest growing energy markets in their 10K, but it's only $2.5 million in royalty

revenues for the year. So it's hard to tell necessarily what their international strategy is. I was going to basically, I mean, the real growth opportunity or the growth path for them is just to get in as many stores as they can all around the globe. And Brett, you're going to talk about part of how they do that. But it seems like they are going global. It's not just stuck in the us. Yeah. And that's my future growth opportunity. Well, no, international is not, but my future growth opportunity is the direct delivery network. I'm slightly confused on what they mean by this because they just call it the direct delivery network and then don't explain what it is. So you have to just piece it together on the conference calls. But I believe it is when

retailers say like Costco, Target, 7-Eleven, Circle K, they just signed, become long-term partners where Celsius prioritizes them with distribution, like gives them really streamlined distribution. So there's always Celsius product coming to their stores. And then say the convenience store will prioritize them with good shelf space, maybe give them their own fridge, stuff like that. Maybe Celsius provides a branded fridge. But this category where they put people on, not people, companies, their customers on the DSD network, as they call it, if you're reading their reports. DSD is just this network that they're describing, which they make it way more complicated than it is. But again, I hope you guys can understand it. That category grew 400%

in Q4 and is driving the majority of their growth. I think a lot of that must've come from Costco because that went from 2% of sales in 2020 to 12% of sales in 2021. So Costco is just on fire for them right now. I think the more tight relationships they have with retailers, the better. And you want them to get into that echelon of consumer packaged good products like Coca-Cola, Pepsi, Gatorade, Body Armor, Monster Energy, et cetera. All right. Highlights and low. Oh, anything on that? I'll say the, and maybe if there's like some consumer packaged goods experts listening to this, they might laugh at this, but it seems to me like they've gone from trying to get into as many stores, like sort of outbound sales to now stores want them on their shelves

because they've gained so much momentum that they're going to be able to sell through a lot of that inventory. So it's almost like they've, it feels like there's a hurdle in CPG where once you are, once there's enough demand, the sales process gets a lot easier. No, they talked about that in the conference call. Yeah. They're definitely in that point. I think there's some sort of chasm or chasm they have to cross, and they definitely crossed it the last two years. All right, highlights and lowlights. Brad, what do you like and dislike about this business? Yeah, this feels like a lame generic answer, but I'm going to use it anyway, just because it is such a high highlight is the impressive top line growth that this company's

delivered. I mean, we gave you some metrics on how many factors higher their revenue is than it was a few years ago at 20 something million. We've talked about them passing a major, major global energy drink carrier on Amazon. And yeah, it is impressive. I mean, there are high flyers and then there are super high flyers. And this is a super high flyer in terms of top line growth, to use my made up term. But the low light is that consumer packaged goods is an extremely tough, almost I'll say impossible space to just create a competitive mode. It takes a very, very long time and a lot of brand equity and a lot of spending to do it. This industry is extremely competitive. So the low light would just be the GNA and the sales and marketing spend

continuing to just exponentially grow with, or not exponentially, but just rapidly grow with revenue, which would make operating leverage a little harder to find. So the demand is not really of a concern at this point. I mean, they've proven that this is a relevant and increasingly relevant product, but they haven't proven a consistent ability to be profitable. And again, that is, as Brett was saying, a factor of them just being able to find so much growth right now that they shouldn't be focused on profitability. But the low light would be that that is an uncertainty right now, what this can look like when demand growth starts to become a little bit more consistent and a little bit more mature. What are the long-term margins and what kind of

return can we expect from here to there considering not to use valuation, but the 34 times gross profit multiple it currently sports? Yeah. And you used our cop out there, Brad, But yeah, there obviously is a lot of growth priced in here. So my highlights, and this is something Barry McCarthy, the new CEO of Peloton said before, but product market fit is really, really rare, really strong product market fit. And I think Celsius has found that. And so just them being able to ride that momentum and continue to leverage that, keep pouring money into marketing.

I think they're doing the right thing there. There are certainly some growing pains, but the market share data and the sales data are coming in just really, really strong. I mean, they've surpassed Red Bull, which I think that's quite the achievement, or at least on Amazon. The other thing is US store count growth was up 65% in 2021. So I think we are seeing that. And that was from a pretty big base. So we're seeing sort of that chasm that they've crossed, like Brett and I talked about earlier. The low light for me, and this is, I guess, more of a back office one, you could say, but they understated their stock-based compensation for the six months ending September 30th by about $15 million. And that's a fairly significant number. So for reference, it's a roughly 13% increase to their annual operating expenses. So they have grown rapidly. So it's not like there's going to be some growing pains and it seems like they've underfunded maybe some critical departments within their company. So apparently they said they lacked accounting resources in order to cope or to calculate it right.

But basically, they hired Ernst & Young to be their auditor. And in this audit, they discovered that they understated stock-based comp by $15 million. dollars. The worry for me, and this was asked on the conference call, is that the only cockroach under the rock or they're going to find more throughout this audit that maybe they've understated expenses or there's other weaknesses throughout the company. And the CEO, I think it was the CEO basically said, we think it's the only one, but there's no way to know for sure. So that to me is a pretty, I guess, glaring low light. Yeah. And it's important for these type of companies too, because inventory, the valuing of inventory that, you know, sometimes there's,

there's a lot of, uh, bugaboos there, I guess to use kind of a funny term, but I'll move into highlights and lowlights for me. Uh, great category. I think it's not in the category of maybe coffee or tobacco, but I think energy drinks, given how it has caffeine, given how people have those habits of drinking one every day, or I, you know, it's probably not as high a soda yet either. But I think, look at Monster's long-term chart. I mean, once you get those customers locked in, I mean, man, things can get profitable. I think there's a long runway to grow in North America. I think there was an impressive strategy marketing-wise trying to grow the business. They've used some pretty unique tools that have worked very, very well. Now, Lowlights,

Brad, he talked about competition. Ryan, he talked about accounting issues. I'll talk about the SEC investigation that was started, I believe, last summer. We do not know what is coming out of that. It was something about securities fraud. So again, that's an overhang for me. If I was going to invest in this company, I would need to know if that's legit or not. And then another low light just in general, I'm unclear on the long-term margins. I think that's a big overhang here, especially at the valuation, although we'll get to that, I guess, in a bold bear case, more or less interested. And then one more that I think is a low light that may be a highlight right now is the reliance on Costco because Costco seems to cycle out a lot of their

non-Kirkland signature partners fairly quickly. They bring in new stuff because that's the whole point. You have new products coming into the store to delight their members. I don't know. That just makes me a bit nervous to reliance on Costco. What are you, what are you guys thoughts on the Costco stuff? I'd be more concerned about Amazon as a sales channel. I'm not sure exactly how much it accounts for their sales, but it,

I imagine a lot of it comes from Amazon. But I, I guess Amazon, maybe Amazon probably doesn't have too much of an inclination to make it difficult for Celsius, but yeah. do you have any brad any thoughts on that the costco amazon relationships not really nothing to add all right nothing to add i mean it's better it's a pro not a con though you know what i mean

like they they got costco as a partner if you were like that's better than not having them yeah it is but i think costco prioritizes kirkland i don't know it just makes me slightly nervous that a lot of their growth is coming from that. And maybe if they, you know, I don't think it's a non, I don't think it's a super low chance they lose that because like I said, Costco cycles fairly quickly, but maybe I'm totally overstating it. Uh, let's move to bull case, Brad, what do you, what do you think needs to happen here for the stock to do well? Yeah, I think ours are pretty similar. So I apologize in advance for stealing yours, but, um, so I think this has to become a ubiquitous with energy drink as younger consumers seek out stevia, natural sweeteners over what's

in Diet Coke, and I don't even know how to pronounce it, or all the other chemicals that fill most of the drinks that we've been drinking besides water for the last several generations. So I think there is very much so a demographic tailwind for them. I think the younger you are, the more health conscious you are. Extremely generally speaking, there are obviously exceptions across the board. But I think they are in a very good place within their niche. Ryan? Yeah. The bulk case was hard for me here because I've really got no idea what the ceiling looks like for this business. And it feels too simplistic to just comp it against Monster and say like,

well, it's the next Monster. And I also don't know, I don't know the industry well enough to know whether or not the Celsius margins profile can look like monsters in 10 years. I just have no idea. But if they're able to keep the momentum going, the valuation will definitely come down, but I could see this beating the market. But I'm kind of lost on my bull case, to be honest. Yeah, there's a lot of uncertainty, upside and downside. Same with me here. I think if your bull case is they're the next big energy drink brand, there's room, like I said, $50 billion in spend in the United States, or sorry, globally, there's room for multiple players. If they become one of those doing $3, $4, $5 billion in sales a year, I think it'll be fine. But that is a lot of growth from here. And I think that leads into the bear case. Brad, what could go wrong here? Yeah. So, I mean, Monster and Red Bull and these other deep-pocketed companies are capable of releasing, and Coca-Cola and everyone is capable of releasing a healthy energy drink and spending a lot of money on it and trying their hand in that category. And so I think continuous competitive entrance, which there have been over the last, since Celsius began, continuous competitive entrance just continued to weigh on its margins. And it just never gets to that 50% conversion that we were talking about of gross profit to EBIT.

And it doesn't get all that close to it either. So I'm not saying that's going to happen. Really impressive company, but I see that as what can go wrong. Yeah, my primary bear case is that growth, not only for the valuation that growth slows, but it seems like right now they've been peddled to the floor for about the last three or four years and growing pains have come out of that. But they've been able to outgrow a lot of their problems. And if growth slows and they've got all these expenses and they've got the legal problems and the accounting issues and their expenses are actually understated, like dramatically understated, those are going to seem like bigger problems. And you're not going to be able to just overlook them and say, well, look at the top line. Yeah.

Minus valuation. I mean, price to gross profit 34 is steep, plain and simple. Share dilution will also be impacting it as well. So it's not like you're at 70 times, say 20, whatever. It's not like you're at 70 times the normalized EBIT when it's going to be in like 2025 or whatever, and you're going to grow from there. There's going to be dilution that's going to kick you out of it too. Their granting pace hasn't been as bad as in the past, but still that's going to weigh

on it. I mean, I couldn't find a much low lights on like the growth or anything, obviously, but I mean, it's just valuation. Ryan, you have something? I mean, if revenue growth looks the same this year as it did last year, then obviously the valuation isn't going to seem like as big of a deal, but I have a hard time imagining they're going to be able to increase store count in the US 65% again. Yeah.

Yeah. And here's just the reference for anyone that doesn't know valuation metrics too well. An average CPG company will probably trade, and this is a mature, really good one, will trade at a price to gross profit, depending on the margins of about eight to 12. So Celsius is about three times that. Growth is obviously slower for a lot of those, but yeah. Right. Right. Exactly. All right. More or less interested, Brad, final thoughts here. uh uh this is tough this is tough i'm gonna go less interested um i thought i was gonna say more interested but um not uninterested but less interested than i was i think and it's the

combination of needing the sec investigation overhanging to go away needing the ernst young investor audit to go away and for all that to kind of uh come up with with green shoots that make me feel a lot better um and then uh i just think at this exact point in time uh for the company where they've just spent all their cash on inventory, there's probably lower risk places to enter into this position in the future, especially considering the valuation. So yeah, I think I have to say less interested, but the other companies I've said this before, I haven't seen myself ever owning. And for this one, I could see myself owning it in the distant future when it's maybe trading in a more reasonable valuation stock. I'm sorry to use that word over

and over again, or when those other things are solved, or when global supply chain issues, which it seems like they've gotten ahead of, ease a little bit, which every consumer package good company is currently dealing with in some capacity. So less interested, but not off the table for me. Maybe we need to have a third category. It's on the fence, more or less, more interested, less interested on the fence, because I feel like we get to that a lot. But Ryan, what's your final thoughts here? I am less interested, not necessarily because of the business we looked at today. I think I was less interested, unfortunately,

before we even really dug into this because I have a really hard time identifying what players in the industry are sort of competitively advantaged for CPG. I've always had a problem with that. And I can't, like, it just, to me, it's super unpredictable. and so I for that reason I'm gonna go less interested and for that reason I'm out uh

you sounded like a shark shark pick the uh yeah I'm in the same boat less interested just because this is and valuation matters right now if it was you know we all think valuation it's a little tough obviously that would keep it on the watch list but there's still the SEC stuff the accounting stuff and I think this is just a category of a hard time getting comfortable with who the winners are. And I think, you know, I just don't know. So there's other CPG categories where I think I have a better grasp of the competitive field and maybe it just takes more research into the energy drink market, but I don't see how multiple competitors can show up. I mean, that's just going to make me less interested here. All right. Last thing here, we got stock for next week and

it's Brad's turn. What do you have for us? Yeah, we're going to do a value stock in two weeks. It's called, it's called Snowflake. Hey, Buffett owns it. It must be a value stock. They do software. So we will tell you about all the software they do. It's a net net, I think. Net net. Yeah. Yeah. That's well, in all seriousness, that's going to be a tough homework assignment, but it's one that I think will be fun. Well, we'll be satisfied when we actually learn what this business does for real instead of pretending on Twitter like I do. But that's going to do it for this episode. Thank you all for listening. Remember to give us a review on either Spotify

or Apple Podcasts. It takes five seconds. Ryan got us over 100 on Twitter the other day. So thank you to that. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see next time.