Don’t believe everything YouTubers say about Celsius

Make sure to always invert

If there's one key takeaway from this article, it's this:

Be skeptical when returns seem too good to be true. Don't blindly trust everything you see or read online. Be selective not just about where you invest, but also about the information you consume. These two are often linked. And when it comes to Celsius: invert, always invert (thanks to Charlie Munger).

Last month, we (Luuk actually) conducted extensive research on Celsius. What caught our attention was that Celsius is currently trading 60% below its peak from May this year. Before that sharp drop, Celsius presented a 100% CAGR over the past five years.

⚠️ This kind of growth is unlikely to continue in the future.

For full transparency: Luuk owns shares in Celsius. But please be careful with your expectations.

What is Celsius?

Celsius is an energy drink aimed at young adults who aspire to stay active and healthy. It contains no artificial preservatives, claims to be packed with vitamins, and scientific studies suggest it has "negative calories." The brand positions itself in contrast to competitors like Monster and Red Bull.

What Celsius doesn’t highlight, however, is that it's loaded with caffeine. While it claims to boost metabolism (the conversion of nutrients into energy), some sources indicate that the actual effect is minimal. Still, this might not be a dealbreaker, as long as the perception holds strong. Just look at the success of Red Bull, Monster, and Coca-Cola. For Celsius, the key to success lies in its sales and marketing.

Why is Celsius stock down 60%?

Since 2022, Pepsi has taken over U.S. distribution after acquiring an 8% stake in Celsius for $550 million. This partnership has expanded Celsius' presence to nearly every major retailer across the U.S. Thanks in part to this deal, Celsius now holds a 9-11% share of the U.S. energy drink market.

So why has the stock dropped by 60%?

This is because Pepsi has built up excess inventory in 2023, which led to reduced orders of Celsius products. Since Celsius only recognizes revenue when Pepsi takes delivery of the products, its revenue grew by "just" 23% last quarter. That is far below the more than 50% revenue growth investors, somewhat naively, were expecting.

Previously, revenue appeared inflated due to Pepsi's bulk buying. Now, with Pepsi holding off on new orders, the revenue seems artificially low.

Before looking up, look down

After Luuk completed his research last month, YouTube is flooded with videos about Celsius. Most focus on potential growth, international expansion, and undervaluation, only briefly mentioning risks. It’s better to invert this process and ask: what could go wrong for Celsius?

• Retail is a tough industry: Each year, around 30,000 new food and drink products are introduced, and estimates suggest 80-90% fail within the first year. Brands do not have the power, distributors and retailers do. Even though Celsius is now more established, many things can still go wrong.

• Competition is fierce. Before working with Celsius, Pepsi had a deal with Bang Energy. After that partnership ended, Monster sued Bang Energy, won the case, and then bought them. That's what we call aggressive competition.

• The consumer decides: You’re probably familiar with the Lindy Effect: the longer something has been around, the more likely it is to stick around. For example, Coca-Cola has been bought by consumers for over 100 years, and it’s likely they’ll keep buying it. Celsius, however, is still new and unproven. While it’s been successful so far, there are no guarantees.

These risks can have significant consequences. In retail, success depends on becoming an established brand. Otherwise, competitors can swoop in and take that position. Scale advantages dominate this industry, and Celsius isn’t there yet.

What YouTubers tell you

Every YouTuber will highlight this:

Immense growth in the past. While this is important for understanding the company’s historical performance, be cautious not to get swept up in the hype. A quick YouTube search will show you this:

Starting your research with watching videos like this, will set you up for failure. While, in theory, a 10x return is possible over the long term, approaching it with this mindset will lead to disappointment. You'll likely lose patience and chase the next hot stock, ultimately missing out on the potential long-term gains you were hoping for.

Invert, always invert - Charlie Munger

To be cautious, we flipped the mindset: instead of expecting explosive returns, we asked, What would Celsius need to do to deliver a 10% annual return over the next five years?

Our conclusion:

What you still need to know:

To decide whether Celsius is a good fit for your portfolio, you need more detailed information. You should consider:

• What is the background of Celsius?

• What factors determine the strength of its moat?

• Is the management team trustworthy and properly incentivized?

• What does the financial situation look like? Is there enough cash? Can Celsius generate strong returns on its investments?

All these questions are addressed in the full (audio) analysis now available to TDI Premium members.

We look forward to welcoming you there. In the meantime, it's a pleasure to introduce you to new companies.

Have a wonderful day and happy investing.

The Dutch Investors