Celsius: All or Nothing?

Did I hold or sell my 'library card' position in Celsius?

The last time we covered Celsius, we shared which assumptions you’d need to make to expect a 10% annual return over five year:

• 10% revenue growth per year

• A net profit margin of 20% by year five

• A P/E ratio of 25 at the end of year five

Fast forward to today, and despite the stock price of this “healthy” energy drink brand remaining almost unchanged, the fundamentals of the business have changed.

We’ve already warned you:

Don’t believe everything YouTubers say about Celsius

That said, the assumptions at the time were reasonable enough for me (Luuk) to make Celsius a library card position.

Since then, we've conducted deep research into the energy drink industry and published an industry report for our premium members.

With expanding our knowledge and Celsius' recent acquisition of Alani NU, the investment thesis for Celsius has changed.

In this article, I’ll lay out both a bull case and a bear case for Celsius and share what I decided to do with my library card position.

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What has changed for Celsius?

On February 20th, Celsius announced the $1.8 billion acquisition of its competitor Alani NU. The deal was financed with $1.3 billion in cash and $500 million in stock.

With $890 million in cash on its balance sheet, Celsius had to take on debt to complete the transaction. The $500 million in stock that will be paid, means a dilution around 9% at current levels.

While both Celsius and Alani NU are marketed as "healthy" energy drinks, their branding is distinctly different.

What unites them? They counter-position themselves against traditional energy drinks like Red Bull and Monster. While Red Bull and Monster target primarily a manly, adrenaline-seeking audience, Celsius and Alani NU focus on health-conscious, often female consumers.

But the question remains: does this acquisition make Celsius stronger? Or is it a sign of weakness?

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Bull Case: The Next Monster?

Celsius is perfectly positioned for growth: The energy drink segment is the fastest-growing category in the beverage market, consumer preferences are shifting toward healthier alternatives, and Celsius operates a capital-light business model. It’s already the leading health-conscious energy drink in the U.S., with a market share of over 10%.

Since partnering with Pepsi in 2022, Celsius’ growth has been nothing short of unstoppable.

Celsius’ growth has been incredible, and this makes it even more interesting: Celsius is barely selling internationally. Given that American trends often spread worldwide, Celsius has an enormous runway for global expansion.

The acquisition of Alani NU gives Celsius a 14% market share

With a 14% market share, Celsius is now a force to be reckoned with, unlocking potential scale advantages. And the best part? Celsius didn’t even pay that much for Alani NU. By leveraging its higher valuation, Celsius raised capital at 21x adjusted EBITDA while acquiring Alani NU at just 13x adjusted EBITDA.

Given that Alani NU has similar growth rates to Celsius, revenues of $595 million and a 3% U.S. market share, the 9% dilution plus the cash that Celsius spent, seemed like a good deal. Together, Celsius and Alani NU could become an unstoppable growth machine.

But before you buy the shares, read the bear case first.

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Bear Case: Acquiring Alani NU is a sign of weakness

Celsius managed to gain market share rapidly by taking a page out of the Red Bull and Monster playbook: they spotted a trend, counter-positioned themselves against the current market leaders and moved quickly by securing a distribution deal with Pepsi.

This is the same approach Red Bull used to steal market share from Coca-Cola and how Monster stole market share from Red Bull. But is it enough?

While Red Bull and Monster had the advantage of being early movers, Celsius is facing fierce competition from Bang Energy, ZOA, NOS, and C4. Initially, I believed the Pepsi partnership would give Celsius a moat against these competitors. But after analyzing the industry, I realized all competitors are backed by either Monster, Coca-Cola, Pepsi or Keurig Dr. Pepper.

💡Having a distribution partnership isn’t a moat for energy drink brands anymore. It has become a requirement to succeed

Not only that, just look at how easily Red Bull and Monster are switching their branding to adapt to changing consumer behaviors:

Acquiring Alani NU is a sign of weakness

The moat of Celsius was already questionable, and now the acquisition of Alani NU raises a real red flag. Celsius had three options to achieve growth:

1. ✅ Organically gain market share in the U.S. through effective S&M.

2. ✅ Expand internationally.

3. 🚩 Buy growth by acquiring Alani NU.

Celsius’ management is basically telling us: “We are unable to grow organically, so we needed to buy growth.” This signals that their moat in the U.S. is weak and that they don’t see viable opportunities for international expansion.

To make matters worse, 70% of corporate acquisitions fail, according to Forbes. One of the reasons is that synergy advantages are often overstated. This could well be the case for Alani NU and Celsius, especially because Celsius can’t integrate Alani NU the way Google did with YouTube, for example.

Source: Sampford Advisors

What really worries me is that Celsius is using the term "Adjusted Synergized EBITDA." If you agree with Charlie Munger and think EBITDA means BS-earnings, this should sound to you like BS, BS, BS. This is something we do not like to see a company do.

The acquisition especially worries me because there isn’t much financial information available on Alani NU. Just like Celsius in the past, Alani NU’s growth could be artificially inflated by distributors loading up on inventory.

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Have I sold my library card position in Celsius?

Of course, the bull case being true doesn’t completely rule out elements of the bear case, or vice versa. But the following thought process helped me reach my final decision:

If the bull case plays out, what’s my potential upside?

With Celsius currently sitting at a $7.5 billion market cap and Monster at $55 billion, I considered what would happen if Celsius achieved the same level of success as Monster over the next 15 years. Even in that best-case scenario, my annualized return would be just 14%. Given that Monster holds a 30% global market share, a lot would have to go right for Celsius to reach that level.

Meanwhile, the risks are significant:

• Celsius might struggle to expand internationally.

• Celsius could lose market share in the U.S.

• Alani NU might underperform or be overvalued.

For a 14% CAGR over 15 years, the risk just isn’t worth it for me. That’s why I sold my library card position. The likelihood of Celsius ending up like Bang Energy, No Fear Energy, or Rich Energy feels too high.

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Please, always make your own decisions

As this article shows, it is surprisingly easily to present a promising bull case by simply leaving out some essential details. That said, I can’t predict the future.

I genuinely hope that, ten years from now, investors who held onto Celsius will look back and tell me what a huge mistake I made by selling.

Whatever you decide, just be cautious about going all-in on stocks that still have a lot to prove.

Thank you once again for being part of this journey and cheers!

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Have a wonderful day and happy investing.

The Dutch Investors