CELH...Have at it

Investment Analysis Clubs Saul’s Investing Discussions
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I’m moving a side conversation with @wsm007 over to the bigger board. The topic is why I still hold a decent slug of Celsius including a small amount of leverage. For context, our total CELH position includes 6.2% in shares and 0.3% in long-dated calls (LEAPs). I fully realize my answers hit about every possible psychological pitfall for holding a stock.

Great question, @wsm007. I’ve challenged myself as to whether I’m just falling for the “better than cash” trap with CELH, but I don’t think so. My reasons:

  • While energy drinks are clearly facing headwinds, CELH is still growing in the 30’s while others are seeing single-digit or even negative comps.
  • Those six new countries are going to kick in at some point. We have seen that whatever inventory Pepsi and Suntory Beverage need in those markets is going to front-run any retail sales. However, the lack of guides gives us little insight into when that will occur.
  • bulwnkl is still quite bullish (no pun intended), and I trust his knowledge of the retail space.
  • The LEAPs are a bit misleading as I added them when the stock fell below $56. I trimmed above $60 but my remaining limit orders to sell haven’t triggered. If the stock gets there, the LEAPs will go to 0%.

I sold ~1/3 of our shares on the bounce after earnings, but it unfortunately wasn’t enough. I covered 10% of our shares at $59 this week but got the premium. That same block is covered next week at $60 for $1.05 per contract. We’ll see.

At this point, I feel CELH has been ridiculously beaten down. It deserved a haircut after the disappointing report, but the company is far from broken. We’ve seen others find a bottom, and I feel CELH will have that moment as well. You compared it to TMDX being left for dead, but I see it more like The Trade Desk maintaining industry-leading growth and solidifying market share while advertising was out of favor. TTD is currently pushing 52-week highs and closing in on 10% of its all-time mark.

Unless energy drinks are on a permanent decline or the international launches are a disaster, I can’t see how CELH’s numbers don’t turn from tougher comps into easier ones. Again, this is where the lack of guidance really hurts because anyone believing that is basically flying blind.

In an ideal world I guess, I’d cut it below 5%. However, I’m admittedly screwing around trying to do it in the $60’s. I can’t say much of what I’ve written above is very inspiring, but that’s all I’ve got.

OK everyone, poke those holes as you see them…

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Has anyone else noticed that they are no longer making claims about “health”?

Check out last year’s 10-k and do a search for “health”; you’ll find GOBS of claims about “health” and how their self-funded “scientific” “studies” support the notion that their drinks effect “health”; it literally goes on and on for pages and pages.

Then check out this year’s 10–k: ZERO claims about “health.” Crickets.

They still reference the “studies” on their site, but the site USED to make the claim that the “studies” supported a claim that their products effect “health”. Now they have switched to claiming that the studies prove their stuff causes more calorie-burning than “diet sodas”. A MUCH narrower claim (…which is true, but ONLY because their drinks have more caffeine).

I think they are all transparently sham “studies”; if you haven’t already read the “studies” to determine if they actually support $CELH’s claims, I encourage you to do so.

Here’s about the only material thing they have to say about “health” in THIS YEAR’s 10k:

"…we are aware of ongoing efforts in the U.S. and in certain foreign countries to seek governmental review of the energy drink industry, including with respect to advertising claims, health claims, caffeine content, and marketing to individuals under the age of 18. Should we become the target of government review or experience limitations on or additional requirements with respect to the marketing or sale of our products, our business, financial condition, results of operations, and cash flows may be materially, adversely impacted.”

In the end, it’s marketing: their visuals still scream “HEALTH!” but apparently their lawyers have decided it’s best if none of their WORDS make any tangible claim about “health.”

So, yeah. Their stuff burns more calories because it has more caffeine. Red Bull or a cup of tea brewed with TWO bags can make the same exact claim. Ultimately imo it’s not much to hang a marketing campaign on. Still, plenty of folks buy Coke partially because they associate Coke with an attractive lifestyle, because marketing.

IMO $CELH has had to re-engineer their marketing claims since they’ve had to back off of their “health” claims. Maybe their original core fans have noticed and have become disenchanted?

All of that to say: perhaps the marketing transition, that I think I’ve identified, has something to do with the recent opacity in $CELH stock performance.

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Obviously it’s very difficult to compare Celsius and The Trade Desk, but here lets consider just the “beaten down” comparison.

At the end of 2022 TTD was at a low of just under $45/share:
PE was 41
shares were down 51% for the year
most recent quarter saw revenue grow 31% YoY
Next year growth was expected to be ~25% (which roughly did happen)

Celsius currently (as of Jul 5 at ~$57):
PE is 63
shares are up 20% in the last 12 months
most recent quarter saw revenue grow 37% YoY
Next year growth – analysts still expect 20-something percent, but I don’t know.

Frankly I don’t think either was truly cheap, but I held TTD at the time. I would just point out that with TTD then, you were getting a higher quality, better run, and far more predictable business for 35% less (PE-wise) than CELH costs now.

I won’t say too much about why I worry CELH will have worse than 20% growth in the next 12 months. Mostly because I just don’t know. They could have 40% growth and I wouldn’t fall off my chair. But it’s at least in doubt, and wholly unpredictable. The one thing we know is that the Nielsen channel checks for Celsius showed volume growing something like 150-170% last year when they were growing revenue at like ~100%, then still volume grew ~75%+ through March when revenue growth was only 37%, and in the last few months Nielsen numbers for Celsius volume have been +63% (Apr 29), +54% (May 20), +46% (Jun 19), and +33% (Jul 3). (Source: x.com)

Bear

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Celsius was knocked down mostly due to Morgan Stanley’s, not Celsius’, scanner data. The reported a recent drop from 10.7% to 9.6%.

Here’s some thoughts to consider:

  1. Shelf presence is critical for sales. We don’t buy what we don’t see and Celsius is just now getting prime shelf space in places like Walmart. Improving shelf space ALWAYS leads to improved sales. John Fieldly, Celsius’s CEO has stated that shelf resets were delayed due to labor shortages in various grocery chains.

  2. Monster and Red Bull will not take Celsius’ gains sitting down. They will promote the heck out of their businesses for a short time in the hopes of containing Celsius’ gains. I don’t expect any permanent damage to Celsius from their promotions, but I do think that this is related to the recent wobble in market share.

  3. Celsius’ positioning of the healthier alternative, compared to highly sugared drinks is good. I took a look at the studies at their website and, comparisons to diet coke don’t wow me, BUT Celsius has pushed their positioning so long that people believe it to be true. Monster and Red Bull just push the energy burst, and I don’t think their branding and sugary ingredients are consistent with healthy energy.

  4. International expansion is a wild card. No one knows how that will go, but I’m very optimistic.

I think patience will be rewarded. We’ll just need to sit tight and see.

Best,

bulwnkl

Long CELH 9.7%

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I’m in the same boat as stocknovice - I was very surprised by the big slowdown in sales and the power Pepsi had over CELH, and trimmed after earnings but not enough (only sold 1/6 of my oversized position). Now I feel the same that the stock is so beaten down that any sort of signs of “normalization” will knock it back up higher.

To bear’s point about the current valuation, remember that this isn’t a software company where sales growth seems to always be accompanied by a commensurate (or higher) increase in S&M - in Q1 they actually reported a big bump in margin, although they expect it to flatten out. If sales growth settles in the 30s this year, I think there’s still some upside in the name, although not 2x potential like at the start of the year when growth expectation was 50+. The big question will be if 30-ish growth is going to happen or if the Pepsi inventory management is actually going to drag it down.

All in all my mental model is still that drinks are an automatic part of consumer routine, and I don’t foresee a drastic collapse in Celsius consumption now that they’ve made inroads into such a large portion of the population. I definitely regret not trimming a larger portion in the post earnings run up, but don’t mind being patient now at these prices, as I would have a small position here if I didn’t have one before.

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I guess with this much uncertainty and no guide, a lot is riding on the next earnings. Showing up in big grocery chains is a big deal though. Shelf space will be key to the story.

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OK, I’m in the same boat as everyone else holding Celsius. Fortunately, I trimmed quite a bit a while ago so my position is quite small. I want to exit the stock, but I am pretty confident that it will recover to some extent, so for the time being I’m in a wait and see mode.

Pepsi reports on Thursday. I’ve not been paying any attention to how Pepsi’s report effects Celsius, if at all. Does anyone see some correlation between the two with respect to earnings reports?

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I haven’t seen a correlation other than Pepsi’s management usually either comments on or is asked about CELH. The past statements have been positive, but we now know that was also a time when Pepsi was lowering inventory purchases.

Given the size of the original partnership deal, I can’t see anything but continued support. What that does for CELH’s stock is anyone’s guess. To @rodatl’s point, I’d guess CELH’s numbers and more importantly call comments on the future will be a bigger factor.

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Every time I see a person that works for pepsi stocking shelves I ask them if celsius sells a lot and they all have a positive response. However time will tell when they report.

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Responding to a couple of the threads on Celsius,

bulwnkl is still quite bullish (no pun intended), and I trust his knowledge of the retail space.

Put Saul’s or anybody else’s name here and I still don’t think it’s great to build a thesis around someone else’s conviction. What if bulwnkl changes their mind? Would you then sell if bulwnkl no longer thought the company was the right place to invest?

At this point, I feel CELH has been ridiculously beaten down.

The P/S ratio is now in line with ELF’s which is around 10, and ELF has a higher growth rate with a proven international business. Are we sure we aren’t price anchoring to a previous price that it was at $95 and now it’s at $60 so it feels cheap? Growth has come down from ~100% to ~40%, and I know there’s are good reasons for the revenue growth rate drop, but still this company may not deserve the 20 P/S ratio if it’s growth rate has dropped like this.

Unless energy drinks are on a permanent decline or the international launches are a disaster

There’s increasing competition in the sector and a lot of bad press and close examination on energy drinks recently. Celsius’ biggest influencer is Jake Paul and his brother Logan Paul has his own energy drink company Prime which is also growing fast. There’s now tons of social media and stories about Prime containing PFAS or forever chemicals. Prime is being sued, and Logan is also suing people for libel.

It’s simply not going to cut it for Celsius to make claims that they are healthy drink without scrutiny. There’s a world of difference between being less bad than Red Bull and Monster versus actually being healthy.

There’s quite a lot of information out there about how these drinks are not actually that healthy for you, even though it’s clear Celsius is better than most,

Celisus puts the same MetaPlus blend in each drink. I’m not sure how much innovation is really here and if their advantage is sustainable. Couldn’t another company produce a healthier pack than Celsius?

What supply chain advantage does Celsuius have? They rely on Pepsi and Suntory which are already causing them issues.

Also there’s increasing competition in the space. Ryse is one more energy drink that is being promoted by fighters that I’ve seen. There’s lots of new other brands as well.

On international they don’t really have a proven track record yet the way that ELF does. They need to hire massive headcount to do this international expansion and it leaves a lot of questions on supply chain logistics since they rely on third parties.

I may be interested to get back into this company at some point but don’t really want to be invested right now until I can see them overcome these supply chain issues or somehow be less reliant on Pepsi.

I also believe Pepsi may be intentionally hamstringing Celsius because they see them as a threat. Celsius has a hidden Cola flavor they never mention anywhere. It’s sold on Amazon and hard to find, and sells for double the price. I haven’t been able to find any rational explanation why this Cola flavor is never mentioned by executives after they talk about other flavors. My best guess is Pepsi has handcuffs on Celsius about what they allow them to distribute. Cola Celsius is an enormous threat to Pepsi if it catches on.

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Great discussion. Keep it coming.

While the spirit of this statement is 100% true, I’m not doing that at all. I’m a big boy who builds my own theses and makes my own decisions. What Saul or bulwnkl or anyone else does is their business not mine.

In this case, bulwnkl’s professional experience gives him better insight into the retail space than I have. I am simply using that info as part of my own breakdown. I trust his input and the fact he’s backing it up with his allocation. Outside that, I’m 100% on my own. I’m not borrowing his conviction. I’m simply borrowing his information. If I was borrowing his 9.7% conviction, I’d be pushing my allocation instead of navel gazing about cutting it to 5%.

Nope. I’m not sure at all, and that could very well be true. But if I’m anchoring, it’s more to my ~$60 cost basis than the $95 high (which is why I’m screwing around with wanting to trim in the $60’s).

And there’s the rub. What if it does deserve that ratio? And what happens if inventories shoot up over the next few months? That’s certainly not impossible if Pepsi overcorrected the last couple quarters, especially if the new shelf space or international launches exceed expectations. One thing we know for sure is those events aren’t hypothetical. They are already happening.

I honestly don’t know the right thinking, which is why I posted in the first place. I value the opinions here.

I’m curious then. If you believe CELH can disrupt a behemoth like Pepsi, isn’t that a reason to buy CELH rather than sell? A possible Pepsi buyout isn’t part of my current thesis, but I’d gladly take the premium and not look back if that transaction occurred.

**

I don’t necessarily want to spin into the “could be” of a buyout since I’m already struggling enough with what “is”. Next quarter will tell a lot. I’m just not sure how much exposure I want going into it.

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I didn’t mean to imply it was a pure copy trade or such. I mentioned because a mistake I used to make was to overly rely on Motley Fool or Seeking Alpha articles for what to buy. My own area of expertise is in tech and software, and I have a lot of hands on coding experience with the software the SaaS companies make. It didn’t stop me from losing just as much as anybody in SaaS when those companies crashed.

That leads into the next point about the negative social media around energy drinks recently. If the public perception is that energy drinks may contain forever chemicals and they are being sold to kids as Prime is, there could be a backlash against this industry. Being knowledgeable about the industry is obviously helpful, but if the energy drink industry goes into a downtrend how will Celsius perform?

A lot of items still point to growth in the energy industry, but there has been a noticeable downtick which corresponds to the timing of the bad press and social media stories. I do see the ingredients in energy drinks coming under more scrutiny by both consumers and possibly regulators.

I’m curious then. If you believe CELH can disrupt a behemoth like Pepsi, isn’t that a reason to buy CELH rather than sell? A possible Pepsi buyout isn’t part of my current thesis, but I’d gladly take the premium and not look back if that transaction occurred.

I wouldn’t be surprised if we wake up one day and Celsius is at $85 because Pepsi bought them out, as they are already an investor and may be interested to acquire this brand similar to what I think they did with Gatorade in 2001 which they got buying Quaker Oats. Pepsi has shown they are a company which grows through acquisition.

I do think it makes sense to factor this in to the investment thesis for Celsius because it’s such an obvious potential take over target for Pepsi, especially as the share price gets depressed now. However, I’m usually avoiding investing in companies which look like good take overs because take overs usually take place when the stock price is depressed.

As for the why the Cola is not being distributed, what good is it for Celsius to have a Cola product if there is no way for them to be able to sell it? If it just stays as a lab experiment, it’s R&D that was wasted to build out this flavor.

I’m curious for the bulls on Celsius where do you see this company innovating? They’ve mentioned going into different types of drinks, but haven’t produced much yet besides slightly different flavors. I am concerned that their entire product line relies on MetaPlus going into every drink.

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From their latest 10-Q form they say this,

An integral part of our value proposition is our focus on the functional energy drink and liquid supplement category, ensuring our products have clear and proven benefits. This is why we invest in research and development from the start and utilize our proprietary MetaPlus formulation in our portfolio, a blend of ginger root, guaranaseed extract, chromium, vitamins, and green tea extract.

What are the “clear and proven benefits” of drinking Celsius? They say it burns fat but that comes from their marketing materials. Have these supposed health benefits been proven by any reputable scientific institution?

The literally list out their ingredients in this document and are hardly spending to develop anything new at all. The barrier to entry for energy drink makers is somewhat low as evidenced by all the new players in the energy drink markets.

The original founder of the company is not there anymore as we saw when his shares were being sold off. It seems like current management’s strategy is to milk the product for as much as possible, which makes sense given the spot they are in.

I was curious how much is being spent on R&D and we get this,

Research and Development — Research and development costs are charged to selling, general and administrative expenses as incurred and consist primarily of consulting fees, raw material usage and test production of beverages. The Company incurred expenses of approximately $0.2 million and $0.3 million, for the three months ended March 31, 2024 and 2023, respectively.

So we have a 13B market company that spends $200,000 to $300,000 per quarter on research and development. That’s maybe one or two employees’ salary. It sounds like they don’t even break out how much R&D is and lump it into SG&A?

How do we expect Celsius can stay ahead of the competitor if they are not investing in R&D?

The company is clearly not innovating on supply chain. They function practically as a subsidiary of Pepsi.

I don’t consider international expansion to be innovation, it’s just part of the due course for expanding more. I’m also concerned they are bitting off more than they can chew by expanding to six countries at once. They’ve said they need to hire massively on sales staff but have never mentioned the purpose of these hires. Are all the hires for international or something else?

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wpr101,
Yeah, this is a heavily marketed consumer product. This is not a drug. Yeah, if you take caffeine before a work out, your work out will go better. That’s not a revelation to some people, but is a revelation to others. What does the consumer get in actuality? A great tasting, low sugar alternative to coffee and an alternative to high sugar energy drinks. These are tasty sources of caffeine for people who don’t like the coffee flavor. The positioning and marketing all support this.

This kind deception goes with many consumer products. I worked with a major baby wipe manufacturer that highlighted aloe and vitamin E as part of the lotion. It was put in at 1 gram per 7,000 gallon batch. Yet, if those label claims were not there, the baby wipes could not be sold. It also turns out that high concentrations of Vitamin E applied externally are skin irritants, so this wasn’t a bad thing.

Do you think a blue disinfectant toilet bowl cleaner does anything? Nope. Those products are designed to make a blue film on the wall of the toilet, release foam, and pleasantly fragrance the air. Virtually all the cleaning is done by the brush.

Now the brand positioning is important. If Chevrolet made the highest quality, most luxurious vehicle in the history of our planet and sold it next to a Bently, which vehicle gets the premium?

If we are looking to Celsius as a highly researched product such medical device or drug, we will be disappointed. If we are looking for someone who is promoting a tasty, lower calorie alternative to coffee and other energy drinks, I think they have something. And I think that with Pepsi’s distribution and this positioning, it will continue to resonate with people.

Best,

bulwnkl

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Their product being a highly research product goes back to their IPO prospectus and current marketing material.

It is our belief that clinical studies substantiating product claims will become more important as more and more beverages are marketed with health claims. Celsius® was one of the first functional beverages to be launched along with a clinical study. Celsius® is also one of very few functional beverages that has clinical research on the actual product itself. Some beverage companies that do mention studies backing their claims are actually referencing independent studies conducted on one or more of the ingredients in the product. We believe that it is important and will become more important to have studies on the actual product.

We have funded six U.S. based clinical studies for Celsius®. Each was conducted by a research organization and each studied the total Celsius® formula. The first study was conducted by the Ohio Research Group of Exercise Science and Sports Nutrition. The remaining studies were conducted by the Applied Biochemistry & Molecular Physiology Laboratory of the University of Oklahoma. We funded all of the studies and provided Celsius® beverage for the studies. However, none of our directors, executive officers or principal stockholders is in any way affiliated with either of the two research organizations which conducted the studies.

The company links to the original six scientific studies they did around the 2007-2009 timeframe.

https://www.celsius.com/the-science/

Here’s one of the studies from 2007,

https://www.celsius.com/wp-content/uploads/2020/03/metabolic_response.pdf

Background: The purpose of this placebo-controlled, double-blind cross-over study was to compare the effects of two commercially available soft drinks on metabolic rate.

Methods: After giving informed consent, twenty healthy men and women were randomly assigned to ingest 12 ounces of Celsius™ and, on a separate day, 12 ounces of Diet Coke®. All subjects completed both trials using a randomized, counterbalanced design. Metabolic rate (via indirect calorimetry) and substrate oxidation (via respiratory exchange ratio) were measured at baseline (pre-ingestion) and at the end of each hour for 3 hours post-ingestion.

This particular one of the six studies doesn’t pass a basic sniff test, as their Celsius drink has 200mg of caffeine, and Diet Coke has 46mg. As you said above, “if you take caffeine before a work out, your work out will go better.” So if caffeine is workout booster, it makes sense if you took 200mg vs 46mg of caffeine your workout is going to go better.

Their MetaPlus pack research was completed in 2008 and they spent 245k that year in R&D, in 2009 they spent $46,000.

Why the low R&D budget in 2024 is so worrisome to me as an investor, is it means this company is never going to have a new product besides some flavorings. The entire product line for the company depends on the MetaPlus formula developed in 2007.

@bulwnkl I’m guessing the company(s) you worked at had some form of research and development team to create new products?

Is it not concerning to you that Celsius will never develop a new product? Or do you think the current product as is will be enough to drive returns for the foreseeable future?

I would view it a lot more favorably for Celsius if they were still doing research on their product, or looking to create new formulas for different types of drinks and innovations. They’ve mentioned getting into different types of drinks, but I don’t see how that could be possible for them.

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@wpr101 cpg, especially “energy” drinks are nothing like pharma. I think you are overthinking what kind of “r&d” goes into creating a new drink. Companies like this rely heavily on flavor companies, where most of the actual r&d is done. What cpg companies mostly do is keep their noses in the air to try and detect as early as possible changes in consumer trends, which they then translate into a product profile, which is delivered to the flavor companies to work up prototypes for market testing. Celsius will never have its own lab etc. I doubt it even has its own manufacturing – all of it is co-man.

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wpr101,
I am an R&D engineer with 30 patents spanning consumer products, photovoltaics, consumer products and biotech technology with Fortune 500 companies. Yeah, I have an R&D background. Many, many cosmetics, food, and cleaning companies claim highly researched products. Think about that claim for a sec. What is a highly researched product? That can mean anything. It’s not to say that there isn’t significant money and studies done in R&D. It’s just not what people think it is. I successfully lead research teams covering key products in billion dollar categories dealing with thickeners, particle suspension, and bleach delivery. I also worked with some leading baby wipes products and hand sanitizers.

These kind of fluff claims happens at stalwart companies like Procter & Gamble, Kimberly-Clark, Gojo Industries, Kraft, and every cosmetic company that I know of. This type of approach to marketing is standard fare for all consumer products. I don’t want to beat a dead horse, so maybe we could discuss this further off line, where I can give you more details than I can share publicly.

Best,

buwnkl

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They just stopped breaking out R&D from selling, general, and administrative expenses on the line-item but if you read the notes from their most recent 10-k you can see that last year they spent 1.7 million on R&D. Every company does not use the same data to decided what is an R&D expense, so using the totals and/or percentages based off it can be misleading.

Research and Development — Research and development costs are charged to selling, general and administrative expenses as incurred and consist primarily of consulting fees, raw material usage and test production of beverages. The Company incurred expenses of approximately $1.7 million, $0.4 million and $1.0 million for the years ended December 31, 2023, 2022, and 2021, respectively.

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Another Scanner data showing that sales slowed down again, and market share declined. With the comparables being really tough over the next few quarters as the PepsiCo distribution agreement will be reflected on the YoY sales, could we start seeing a no growth story?
There are several non-tracked channels that don’t show in the report, and we continue to see increased placement, but I can’t refute that all current quantitative indicators are negative. I trimmed 50% of my position one week ago and I am considering exiting altogether. what am I missing?

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I’ve been seeing a couple things lately in the energy drink market, from my own personal experience.

With the Walmart locations near me, Reign has been paying for the best placement locations. Celsius just isn’t staying on the shelves either, there’s almost never a case of it available, just individual units. Appears to more be a restocking issue than how quickly it sells. Bang had similar shelving issues a few years ago.

Ghost has been significantly outperforming Celsius in my local market. They’re also aggressively promoting it with pricing/sales, notably with Cumberland Farms offering Buy 2 Get 1 free for Ghost energy drinks.

I’m waiting for the latest energy drink market share reports for 2024 before I make a decision.

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