When it comes to the beverage industry in the U.S. stock market, the first companies that come to mind are likely the two giants, Coca-Cola and PepsiCo, which have dominated the entire beverage industry.

With the increasing popularity of energy drinks, this segment has realized explosive growth, giving rise to some very successful companies, the most notable being Monster Beverage (MNST), which has become the stock with the highest ROI in the S&P 500 Index over the past 25 years.

However, another emerging company is making waves in the energy drink industry, that is Celsius Holding (CELH). Over the past 5 years, Celsius's stock price has increased by 2600%.

This article will discuss why the energy drink industry continually produces star stocks. Will Celsius be the next Monster Beverage?

Why does the energy drink industry always produce star stocks?

Because the energy drinks industry has a large potential space, as long as the whole cake keeps getting bigger, potential players may have opportunities to benefit.

As more and more consumers seek healthier alternatives, functional energy drinks with less sugar are becoming increasingly popular, making the energy drink category one of the fastest-growing categories in beverages, and the market potential is enormous.

According to Allied Market Research, it is predicted that by 2030, the market size will approach $108.4 billion, growing at an average annual growth rate of 8.2%. Grand View Research, on the other hand, is even more optimistic, believing the energy drink market size could reach $177.58 billion by 2030, with an average annual growth rate of 8.3%. Regardless of the specific size, these reports agree that the energy drink is a rapidly developing industry.

So, which players are involved in the energy drink market?

According to Statista data, the top three in the U.S. market are Red Bull (39.5%), Monster Beverage (29.7%), and Celsius (5.9%).

It is worth mentioning that before 2020, Celsius did not make it to the top three, but over the past few years, it has replaced Rockstar to become the third-largest energy drink brand in the U.S. due to its explosive growth.

You might be curious why Celsius has managed to break out in the highly competitive energy drink market.

How did Celsius rise?

Celsius is an American functional performance energy drink company, founded in 2004. Currently, Celsius has four product lines and is sold in ten countries, with a well-established distribution channel in the U.S., including supermarkets, convenience stores, gyms, pharmacies, etc.

Energy drinks contain caffeine, similar to coffee, which can refresh and enhance attention, playing a role in activities such as studying and working. However, unlike coffee, functional beverages usually have a sweet taste because they contain a large amount of sugar and artificial sweeteners. This is also the criticism regarding the unhealthiness of energy drinks.

Unlike its competitors, Celsius focuses on health, and its energy drinks do not contain sugar or artificial sweeteners. The products include natural ingredients like green tea, guarana, ginger, and various vitamins, and have formed a differentiated advantage through the "health" label.

As people's health awareness increases, coupled with consumers emphasizing healthy diets during the pandemic, Celsius has quickly developed in line with these two new trends.

In the past five fiscal years, Celsius's revenue has maintained a high growth trend: soaring from $52.6 million in the 2018 fiscal year to $0.6536 billion in the 2022 fiscal year, an increase of 1142%; performance growth has also driven stock price increases, with stock prices rising by 2600% over the past five years.

How does Celsius compare to Monster Beverage?

As an emerging company, what are its differences from one of the industry giants, Monster Beverage? Is it possible for it to become the next Monster Beverage in the future? We can compare them in terms of products, growth, profitability, and valuation.

In terms of products, according to a report from Caffeine Park, Celsius and Monster Beverage offer a variety of flavor options, and the taste varies from person to person. Regarding caffeine content, a 16-ounce can of Celsius contains 200 milligrams of caffeine, which is higher than the 160 milligrams in Monster Beverage, so it may have a stronger energizing effect. Additionally, there is a significant difference in sugar content—Celsius contains no sugar at all, while a 16-ounce can of Monster Beverage contains 54 grams of sugar. This means that for those trying to limit sugar intake to avoid obesity and other health issues, Celsius appears to be healthier.

In terms of company size, Monster Beverage is much larger than Celsius. In the first three quarters of the 2023 fiscal year, Celsius had a revenue of $0.97 billion, while Monster Beverage’s revenue was $5.41 billion, which is approximately 4.5 times that of Celsius. Moreover, in terms of market cap, as of January 4, 2024, Celsius's total market cap was $13.1 billion, while Monster Beverage’s market cap was $60 billion, about 3.6 times larger than Celsius.

In terms of growth potential, Celsius far surpasses Monster Beverage. In the first three quarters of the 2023 fiscal year, Celsius's revenue growth rate reached 104%, while Monster Beverage only grew by 12.8%. If Celsius can maintain this growth momentum, there is a chance to narrow the size gap with Monster Beverage.

However, in terms of profitability, Celsius is slightly inferior to Monster Beverage. In the first three quarters of the 2023 fiscal year, Celsius's gross margin was 48.1%, lower than Monster Beverage's 52.8%. A higher gross margin indicates that the company’s products are more competitive within the Industry and have stronger bargaining power.

From a valuation perspective, Celsius appears slightly expensive based on the current stock price estimates. As of the closing price on January 4, 2024, Celsius's PS valuation was approximately 11.41 times, while Monster Beverage's PS valuation was around 8.67 times; if estimated using the PE ratio, Celsius is at 117.8 times, significantly higher than Monster Beverage's 39.1 times.

Overall, compared to Monster Beverage, Celsius is still a relatively small beverage company, and its profitability is not as strong as that of Monster Beverage, but Celsius has better growth potential, which is why its stock price valuation is considerably higher than that of Monster Beverage.

What does the growth outlook for Celsius look like?

One might ask, after experiencing rapid growth over the past few years, can Celsius continue to maintain such high growth in the future?

According to reports from Entrepreneur, the future growth prospects of Celsius mainly lie in two aspects:

1. Collaboration with PepsiCo

In August 2022, PepsiCo acquired a portion of Celsius shares for $0.55 billion, which undoubtedly gives Celsius greater influence in retail channels. As Celsius continues to collaborate with PepsiCo to expand sales points, shelf space, and sales volume should continue to grow.

Jefferies research forecasts that following the agreement with PepsiCo, Celsius could capture 8% to 9% market share in the U.S. retail market by 2025. Before the agreement, the company's market share was only 5% to 6%.

2. Internationalization

Entrepreneur believes that most of Celsius's growth opportunities are overseas. Currently, the majority of the company's revenue comes from the North American region, with a very small proportion from overseas. As of Q1 2023, 96% of total sales came from the North American region. Given that Celsius's business model has been fully validated in the North American market, replicating this model in overseas markets will be the company's next goal. If its brand awareness can rise as rapidly as it has in the U.S., then international growth could be very fast.

Based on the above two assumptions, some Analysts believe that this year Celsius's earnings per share will reach $1.32, and next year earnings per share will reach $2.15. If Celsius can continue to maintain high-speed growth, it may digest its high valuation in the future.

Potential Risks

High valuation: Generally speaking, companies with very high growth potential tend to have high valuations for their stocks. Based on the closing price on January 4, 2024, Celsius's PS valuation is 11.41 times. Compared to its own past, this valuation level is in the lower middle range over the past 5 years. However, compared to the Industry, its valuation is far above the industry average of 3.24 times. This is because the current stock price may have already reflected future growth potential, and any slowdown in the company's growth may lead to significant stock price fluctuations.

Intense industry competition: Analysts at The Motley Fool believe that competition in the beverage Industry is fierce, with very low entry barriers; anyone with funds can immediately enter the beverage business. Therefore, they believe that brand recognition is key for sustained success in the beverage Industry. Although Celsius has impressive growth rates, its scale is still relatively small, and its brand influence is far weaker than that of Coca-Cola or PepsiCo, hence they consider Celsius's economic moat to be very weak.