Buy 50% growth after 60% pullback?

Scanning for stocks with a market cap above $2 billion, a FCF margin +5%, and a YTD drop of 40% (60% since peak in May), Celsius Holdings (CELH) quickly stands out.

Firstly, there are a few reasons for this dramatic pullback.

1/ Growth is concentrated to the energy drink market. Celsius contributed 47% of all energy drink category growth YoY in Q2 2024.

2/ Growth has also slowed significantly. But after having grown triple digits for three years straight, investors shouldn't be surprised by a deceleration in growth. And +50% is decent for any industry. But following the strong numbers in Q3'23, we're likely to see negative top line growth in Q3'24.  

And a closer look at the sales trend shows that the deceleration probably still has a few quarters to feed through to get to steady state on an annual basis, with growth at 20% in Q2'24. However, CELH also reported shelf space gains of around 35% in Q2'24, suggesting that H2 could surprise on the upside.     

So what are does CELH's growth prospects look like?

Starting with the macro, strong health and wellness trends continue to drive a zero-sugar adoption worldwide. CELH  is #3 in the Energy Drink market in the United States and will add six new markets in 2024.

CELH has a 22.1% share on Amazon, which is higher than Monster (21.8%) and Red Bull (13.8%), showing that loyal customers consistently buy in bulk.

But the U.S. MULOC (multi-outlet with convenience store) is where new consumers find the brand, and this area prompts improvement. 36.5% growth here is strong, which also explains the 47% growth contribution to the energy drink category. But new customers have a loot of choices and more effort is needed here i.e. marketing), that will potentially put pressure on margins.

Two other areas should be strong growth drivers in 2025 and beyond.
 
A/ International revenue is just 5% of revenue, but show a good growth trajectory at 30%. Company does not mention much about this but Canada is still very strong and we're likely to see deeper inroads into Europe and Australia in 2025.

B/ New products. Management says they want to push into water and food products (such as protein bars). 

All in all, this should support the long term growth prospects. 

With the share pulling back 2/3 in the past 4 months, from $96 in May to $33 now, while consensus expects revenue of $320m in Q3'24 (compared to $385 in Q3'23) and $370m in Q4'24 (compared to $347 in Q4'23), a lot of the fear of decelerating growth should be priced in.   

So what is valuation like?

With 1.49BN in TTM Sales, 50.4% TTM gross margin, a 19.6% Net margin, CELH can offer a 16.5% FCF margin and 3.2% FCF yield.

Share now trades at P/E 27x 2024, and 24x EV/EBITDA 2024. 

On the chart, it's clearly back in multi-year support zone.

While investors shouldn't expect a return to ATHs any time soon, a test to get back into the $50-60 range in the coming year seems likely.

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