When investors start turning on growth stocks, things can get ugly quickly. Celsius Holding (NASDAQ: CELH) is a prime example of this. Although in recent years it has generated some impressive returns for investors, the tide appears to have turned significantly. Entering trading on Monday, Celsius shares had fallen more than 60% over just the past six months.
Below, I’ll take a look at why investors have become so bearish on the stock recently, and whether this could provide a good buying opportunity.
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Celsius Holdings has been hot Growth stocks In recent years, it has become one of the top names in the energy drink industry. But the inevitable problem that many growth stocks face is that their impressive growth rates slow down sooner or later. When that happens, the upside and excitement can start to dissipate.
For Celsius, alarm bells started ringing for investors and analysts in May when it announced its quarterly results. Revenue for the period, which ended March 31, grew at a rate of 37% year over year. Although this increase was impressive year-over-year, it was a much slower pace than the 95% revenue growth it achieved just three months ago.
In the months that followed, analysts took more bearish positions, lowering their price targets for the stock, leading to much less excitement around Celsius than in the past, when it seemingly could do no wrong.
Not only has Celsius’ growth rate diminished, but turned negative in the company’s latest quarterly results. However, this should not come as a huge surprise to investors, as Celsius’ main distributor, PepsiCois reducing inventory levels, and this has affected the energy drink company’s latest numbers.
Celsius’ third-quarter sales totaled $265.7 million for the period ended Sept. 30, down 31% from the same period last year. The company blamed the decline on “obvious supply chain improvement by our largest distributor,” without naming PepsiCo specifically.
Management says it believes the situation has now stabilized, but it still confirms that there is a significant vulnerability in Celsius’ operations where such an adjustment from the main distributor could have a significant impact on the company’s overall financials. Due to weak growth and high operating expenses, Celsius’s net income fell by a whopping 92% during this period, to just $6.4 million.
Such large exposure to a single distributor highlights the greatest risk involved with Celsius shares, and this may make it an untenable option for many investors.
Although Celsius has reported some disappointing earnings numbers recently, investors should be careful not to give too much weight to just the three-month period when making investment decisions. With Celsius still having some attractive long-term growth prospects in the sugar-free energy market and having a key partner in PepsiCo working with it, I wouldn’t give up hope in the stock just yet.
Although its earnings took a hit last quarter, based on analyst estimates, Celsius stock is trading at 29 times next year’s earnings, which is much lower. Multiple profits What investors paid in the past. It may take some time, but if its growth rate can recover, Celsius will likely be a good stock to buy and hold now that its valuation is more reasonable.
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David Jagielski He has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius. The Motley Fool has Disclosure policy.
What’s wrong with Celsius Holdings shares? Originally published by The Motley Fool