Celsius stock price plummeted more than 30% in less than a month. Is it time to buy the dip?

The same thing continues to happen to stocks of energy drink companies, about twice a year for the past five years. Celsius Holdings (CELH -0.53%): The stock price fell by more than 20%. And as of this writing, Celsius stock has fallen once again. This time it has fallen more than 30% over the past few weeks.

For investors who hate losing money, buying stock in a company that regularly falls more than 20% may seem like a bad idea. However, Celsius stock has risen a total of more than 5,000% over the past five years, making it one of the greatest five-year stock performances in history. So it was a good stock to own despite significant volatility.

CELH data from YCharts.

Routine volatility is back. Now, it is important to consider whether anything is different for Celsius this time around and whether this is a dip worth buying.

What’s the problem with Celsius this time?

Celsius has enjoyed several years of explosive sales growth for two reasons. First, the energy drinks segment has continued to grow at a good pace. Second, the company has been gaining market share at an encouraging pace. These two factors have led to the company’s customary triple-digit sales growth.

Evercore Analyst Robert Ottenstein points out that this isn’t necessarily happening right now. Back in May, analysts spoke about slowing growth in energy drinks, noting that the company had seen its market share fall from 12.4% to 12.2% in recent weeks, according to The Fly. And Ottenstein is not alone. Many analysts are adjusting their financial models to account for Chelsea’s slowing growth.

But this isn’t necessarily new information for investors. In 2023, Chelsea’s revenue has increased by a whopping 102% compared to the previous year. However, in the first quarter of 2024, revenue grew only 37%. So investors already knew that growth was slowing. Recent comments from analysts have not changed this story.

Moreover, Ottenstein may have pointed to a brief decline in Chelsea’s market share. However, analysts’ market share estimate of 12.2% is actually higher The market share in the first quarter was 11.4%, which was higher than the company’s own estimate. Investors can therefore interpret this more optimistically if they wish.

In other words, analysts are spooking investors by pointing to slowing growth in Celsius. But that was already clear in advance. Moreover, investors are concerned that the company will lose market share. However, estimates suggest the decline is insignificant and its share is still higher than previous estimates.

All of this points to investors overreacting to the recent drop in Celsius stock.

What should investors do now?

To summarize so far, Celsius stock has been volatile, falling more than 30% in recent weeks as investors overreacted to commentary about its revenue growth. Would this be a stock to buy? There are two things to consider:

First, the stock still has a ways to go as a bargain for investors looking for a good deal. From a price-to-sales (P/S) valuation perspective, Celsius stock has become cheap several times in recent years and could fall further. Moreover, it still trades at a premium compared to its top competitors. monster drink.

CELH PS Ratio data from YCharts.

You could argue that Celsius stock should be trading at a higher P/S valuation than Monster, and that may indeed be the case. However, it needs to fall further to be considered a reasonable price.

Second, Celsius can still create significant shareholder value from here, so investors shouldn’t discount its growth potential when looking at its valuation.

The most obvious catalyst for Chelsea’s growth has been its expansion into international markets, which generated just $16 million in revenue in the first quarter. By comparison, Monster had net sales of more than $700 million in international markets during the quarter. That’s nearly $3 billion on an annual basis.

Top dog Red Bull is a privately held company, so unfortunately investors don’t have access to its numbers. But they can make an educated guess. Red Bull had nearly 37% market share in the U.S. in the first quarter, equivalent to about $1.1 billion, according to Celsius. This means that Red Bull generates approximately $4.5 billion in sales in the United States each year.

According to Red Bull, the company will generate approximately $11 billion in revenue in 2023. This means it generates more than $6 billion in annual sales in international markets.

Even if Red Bull and Monster remain at the top of the energy drinks market internationally, given the size of the other two companies, Chelsea could still have a sales opportunity of over $1 billion.

For perspective, Chelsea will generate total annual revenue exceeding $1 billion for the first time in 2023. So the company could realistically double its business from here over the long term before growth peaks.

Bottom line, I wouldn’t buy Celsius stock after a 30% drop like it was a once-in-a-lifetime opportunity. No, it may actually be cheaper. But this business is special and the long-term potential is still quite high, so perhaps this 30% drop is a good opportunity to buy some stocks for the long term at a better price than last month.