Down 61% in 6 Months, Is Celsius a Growth Stock Worth Buying Now?

Energy drink company Celsius Holdings (NASDAQ: CELH) has been a phenomenal long-term holding, turning a $10,000 investment into more than $1.7 million over the last decade. It's a great example of how a solid product lineup with financial backing, distribution, a powerful supply chain, and marketing can take a company to new heights.

But Celsius' once scorching-hot ascent higher has turned cold, as the stock is now down 61% in just six months. Here's why Celsius could be a growth stock worth buying now, as well as some risks to consider before you do.

Image source: Getty Images.

Monster gains

A big reason why Celsius is such an alluring stock is due to its potential to disrupt the energy drink industry. Humankind's obsession with caffeine dates back several thousand years with tea in China, followed by the globalization of coffee during the Renaissance. Carbonated caffeine is a much-more recent discovery -- largely attributed to the birth of Coca-Cola in 1886. But modern-day energy drinks are in a league of their own.

A 12 oz can of Coke has 34 mg of caffeine compared to 120 mg in an energy drink from Monster Beverage. Celsius ramps up the intake to a whopping 200 mg per 12 oz can or even 270 mg for its Celsius Essentials line -- all while promoting that the drink "accelerates metabolism" and "burns body fat."

More caffeine doesn't automatically mean a better product. However, it would be a massive market opportunity if Celsius could give consumers a better all-around experience than Monster or Red Bull. And that potential is a significant reason why Celsius stock soared to new heights earlier this year.

The euphoria isn't entirely misguided. After all, Monster Beverage stock has increased more than 15-fold in the last 15 years. Today, the company sports a $49 billion market cap -- seven times that of Celsius. So there's no denying the market opportunity for Celsius. However, Celsius is no Monster -- at least not yet. Monster is a consistently profitable, high-margin business. It has higher margins than Celsius and a lower-forward price-to-earnings ratio but a higher-forward price-to-sales ratio.

MNST Operating Margin (TTM) data by YCharts.

So, it's not like Celsius is an inexpensive stock just because it is down a ton over the last six months.

Buying Celsius over a stock like Monster is a bet not on where either business is today but where they are headed. If Celsius can take market share from Monster, it will probably be the better long-term holding. However, the risk is that Celsius fails to live up to exceptions, or worse, loses market share and falls out of favor.

Balancing risk and potential reward

In investing, it's easy to get caught up with where a company could be headed and ignore other scenarios. Celsius is at that point in its development where it could continue capturing market share, but it could stall or even lose market share.

Celsius' distribution partnership with PepsiCo has taken its sales to new heights. But many consumers have only recently been introduced to Celsius for the first time. It remains to be seen if those new buyers will permanently switch to Celsius over a competitor like Red Bull or Monster, or incorporate Celsius into their beverage repertoire along with caffeine alternatives like coffee, soda, and tea.

With Celsius, the risk is just as much a consideration as the potential reward. The trailing results and analysts' projections look compelling at first glance, but it's important to understand that those projections depend wholly on the company's trajectory and sustained growth.

Celsius has a long way to go

When it comes to consumer products like Celsius, I'm a big believer in the power of grassroots investing. You can learn a lot about a company by going to a grocery store or convenience store and seeing how Celsius is marketed compared to other products, and maybe even trying it out for yourself. In all honesty, I rarely consume energy drinks and prefer coffee. But Celsius is noticeably better marketed and tastes way better than alternatives -- at least from my first-hand experience.

Still, no amount of marketing glitz and glam can help Celsius succeed long term. It really all comes down to product innovation and Celsius' ability to connect with consumers so they keep coming back to the product. Celsius doesn't really benefit from a one-off purchase by a coffee drinker like me; it needs to "wow" consumers to the point they become repeat buyers.

Celsius' stock looks like a much-better value now that it has sold off, but substantial risks remain. Therefore, opening a starter position in Celsius or just adding it to a watchlist may be a better decision until the company has a few more years of mass distribution under its belt and can prove its products are good enough to merit sustained customer loyalty.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius and Monster Beverage. The Motley Fool has a disclosure policy.