Is Celsius Stock a Buy After Falling 49% From Its 52-Week High?

Shares of energy drink maker Celsius Holdings (CELH 4.41%) have taken a severe hit recently. Down a staggering 49% from its 52-week high of $66.74, the stock is currently trading at about $34 per share as of this writing.

Much of the recent pressure on the stock stems from news that wholesale giant Costco recently launched a private-label Kirkland Signature energy drink. The new product is priced significantly lower than Celsius, sparking fears of intensifying competition and prompting a sharp sell-off in the stock over the past week.

The Costco news highlights the competitive environment of the beverage space. But it’s not the primary reason I’m cautious. The real issue keeping me on the sidelines today is valuation. Even after the stock has been nearly cut in half, its valuation may still reflect too much optimism.

Image source: Getty Images.

Ruthless competition

Of course, the stock commands a premium valuation for a reason.

The company’s fourth-quarter revenue came in at $722 million, up from $332.2 million in the year-ago quarter – but with the help of some acquisitions. The company acquired Alani Nu on April 1 and the Rockstar Energy on Aug. 28.

Its acquisition of Alani Nu has been particularly successful. Management noted in the company’s fourth-quarter earnings call that Alani’s fourth-quarter net sales of $370 million represent 136% year-over-year growth on a pro forma basis.

However, growth in the beverage industry is rarely uncontested. The recent news of Costco introducing its own Kirkland Signature energy drink – priced about 55% lower than Celsius products – is a stark reminder of the challenges ahead. While Costco accounted for only about 11% of Celsius’s total sales last year, Costco’s move offers a reminder that competition in the energy drink space is intense.

If more retailers or other deep-pocketed competitors push aggressively into the category, Celsius could face pricing pressure, which, of course, would negatively impact its profit margins.

Indeed, we saw a glimpse of margin pressure in Q4, when the company’s gross profit margin declined to 47.4% from 50.2% in the year-ago quarter. But this contraction was driven largely by integration and distribution costs associated with its recent acquisitions. Still, this is a key metric investors will be watching going forward.

Despite these clear competitive risks, the market is still valuing Celsius as if it can not only maintain its strong market positioning but also continue growing sales while protecting its margins. As of this writing, Celsius trades at a forward price-to-earnings ratio in the twenties – not wildly expensive but certainly not cheap either.

The Costco news is ultimately just a symptom of a broader reality: competition in the beverage market is intense and – sometimes – even cutthroat.

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NASDAQ: CELH

Celsius

Today’s Change

(-4.41%) $-1.57

Current Price

$34.02

Key Data Points

Market Cap

$9.1B

Day’s Range

$33.93 - $35.52

52wk Range

$32.36 - $66.74

Volume

267K

Avg Vol

5.4M

Gross Margin

49.20%

Celsius stock: time to buy?

So, is Celsius stock a buy after falling 49% from its 52-week high? I don’t think so.

The company has built a fantastic brand and is generating impressive sales growth. But at this valuation, the risk-reward trade-off simply isn’t attractive enough to warrant buying shares today. The stock’s current price requires the company not only to navigate an intensely competitive environment but also to continue growing at a robust rate while doing so.

There is always a possibility that Celsius will defy the odds and easily thrive in a more competitive environment, growing its earnings fast enough to make today’s price look like a bargain in hindsight. But, for me, the stock looks too risky – even at this price point.