Celsius Holdings

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3.5/5

Celsius Holdings is a functional energy drink company known for its “thermogenic” beverages, marketed towards health and fitness enthusiasts.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Celsius Holdings (CELH) is a global company that specializes in the development, marketing, and distribution of what it labels “functional” energy drinks. Their products are designed to provide energy while also boosting metabolism and aiding in weight management through a proprietary blend of ingredients they market as “MetaPlus”. They aim to target health and fitness enthusiasts, as well as everyday consumers looking for a healthier energy option.

Revenue Streams: The Company generates revenues primarily through the sale of finished products for the most recent three months ending September 30th. Revenue is distributed geographically with 58.5% originating in North America (United States and Canada), 37.8% coming from Europe, 2.1% in Asia-Pacific, and 1.6% from other sources. They’ve also established a partnership with Pepsi to expand their distribution network for the coming years.

Industry Trends and Competitive Landscape

Industry Growth: The energy drink market is generally considered a high growth industry, driven by increased consumer awareness of functional beverages and demand for alternatives to traditional sodas and coffee. There is a general push towards “better-for-you” beverages.
Competition: The energy drink market is highly competitive and includes various players from multinational giants like Monster and Red Bull, to a growing number of smaller, regional players and specialized brands. Many companies use a mix of strategies including innovative product formulation, robust marketing, and extensive distribution networks.

Competitive Advantage: The Moat Celsius’s business is predicated on what it believes to be sustainable competitive advantages. But not all are clear as of current time. They can be summarized as:

First Mover Advantage: Being among the first to market a thermogenic energy drink gives Celsius a first-mover advantage, but it has to be seen if they can sustain it against competition.
Proprietary Formulation (Intangible Assets): The company’s MetaPlus formula gives them the ability to market themselves as something unique, giving customers a reason to pick them. However, the uniqueness isn’t protected by a patent and could be easily replicated.
Growing Brand Awareness: Celsius’s brand awareness is increasing as more customers become aware of the product. They are also partnering with more and more prominent celebrities and influencers to increase visibility and gain brand recognition.
Distribution Network: Partnering with Pepsi has given them a massive distribution network. While having this network is a huge plus for the company it is not completely proprietary and they may end up having to compete with Pepsi for shelf space.

Moat Rating: I would rate their moat as a 3 out of 5. While they have many things going for them, they face increasing competition that can replicate the business model and that also have superior distribution networks (like Coca-Cola and Pepsi). The brand is still in its early stages and the company doesn’t possess any patents over its main ingredients. They are a very good player but might struggle to maintain above-average profits in the long run.

Risks to the Moat and Business Resilience

Intense Competition: The energy drink market is filled with both established brands and startups, all vying for consumer attention. This level of competition can erode margins and make it hard to sustain growth, especially given that most of their advantage is based on the brand image rather than proprietary tech.
Changing Consumer Preferences: Consumer tastes and preferences regarding ingredients (such as sugar content and additives) and specific trends can shift rapidly. It’s very important for companies to keep a close eye on the customer base, so they don’t fall behind to others who can easily take advantage of new customer trends. This is particularly relevant in a niche market like energy drinks, where the flavor profiles and types of ingredients change often. * Brand Sensitivity: Consumers’ preferences in brand could change and that would severely affect their sales since they are more of a brand company than anything else.
Regulatory Risk: As the market develops, authorities will be paying more attention to it and regulatory action on specific ingredients or the marketing of these products could affect the company’s profitability.
Distribution Dependence on Pepsi: While the partnership with Pepsi grants access to a major distribution network, they are now tied to Pepsi’s ability to maintain distribution, and their terms. Furthermore, they are at a disadvantage in terms of pricing and shelf space.

Financials * Revenue Growth: The company has shown significant revenue growth in recent years, with a 112.2% increase in revenues to 331.7 million for the most recent three months ending September 30th, 2023 when compared to the same three month period in 2022. However, revenue growth has slowed down from the 137.2% increase in revenue they had from 2021 to 2022, indicating the company is hitting a saturation point and needs to continue working on ways to increase their revenue.

Gross Margin: The company’s gross margin has remained remarkably consistent for the past 3 years, currently standing at 43%.
Net Income: While the company had a net income of $17 million in 2021, the company faced considerable losses in 2022 and has also posted a loss of $141 million in the most recent nine-month period ending September 30, 2023. While this shows a big growth in revenue, it also shows the problems associated with their sales structure and over-reliance on celebrity endorsement and advertising.
Cash Flow from operations has been positive, increasing significantly from 2022 to 2023.
Debt: The company has almost $300 million in debt, which, while manageable, will lead to pressure to increase profits in coming quarters.

Understandability Rating: I would rate the understandability of the business as a 2 out of 5. While the concept of a functional energy drink may be easy to grasp, the intricate details of the beverage industry—including the complexities of distribution, formulation, branding, and advertising—can be quite challenging to fully understand. Their financial statements are complicated due to the accounting for debt, warrants, and stock options.

Balance Sheet Health: I would rate their balance sheet health as a 3.5 out of 5. It is positive that they have been able to increase cash flow, and that gives them the financial flexibility to continue making investments into the company. However, with over $200 million in liabilities, it is not a perfect balance sheet, especially when a lot of this liability comes from short-term debt (accounts payable). Having said that, the company is clearly in high growth mode and debt would be necessary to grow the business. The risk is also mitigated by the fact that most of it is related to operations and not investments.

Recent Concerns/Controversies & Management’s Response

Slowed Growth and Increased Losses: Recent financial results reveal a slight slowing in revenue growth rate and an increased net loss, which has brought concerns about the company’s future prospects, and prompted some analysts to rate it as “sell”. The management attributed this change to inventory issues and increased input costs. They have also said that they are increasing prices to offset the increased cost. The management stated that growth will be more manageable going forward and will not be at the expense of profitability.
Stock Options and Dilution: As a part of management’s compensation, a large amount of stock options were issued. This has been a topic of concern with many analysts and has also resulted in increased stock dilution.

Additional Notes: * The company has been relying heavily on distribution agreements to expand their reach. The company needs to solidify its brands so as to not be dependent on distribution agreements. * The company faces growing concerns regarding their sustainability in a competitive market.