PepsiCo’s Celsius Play Could Lead to Acquisition of Hot Stock

John Smith

As the stock market continues its volatile swings amid economic uncertainty, one sector that remains a relative oasis of strength is consumer discretionary. This market segment, which contains industries like retail, media and automobiles that rely on discretionary spending, has outperformed the broader S&P 500 index by over 10% so far in 2023.

Within this winning sector, a particularly hot stock has emerged in recent months: Celsius Holdings (NASDAQ: CELH). The maker of fitness-focused energy drinks has vastly outpaced even its thriving consumer discretionary peers this year, surging nearly 50% as consumers flock to its lineup of sparkling beverages.

Celsius’ Standout Growth

Celsius has managed to carve out a unique niche for itself in the competitive beverage industry. Unlike traditional sugary energy drinks, Celsius uses no preservatives, aspartame or high fructose corn syrup. It has successfully marketed itself as a “fitness drink” that aligns with an active, health-conscious lifestyle.

This positioning has driven exceptional top-line growth. In its most recent quarter, Celsius reported revenue spiked 98% from the prior year to $188 million. Its full-year 2022 sales more than doubled to $590 million. Unlike many young companies seeing rapid expansion, Celsius is also profitable, earning $10 million last quarter.

Thanks to this combination of hyper-growth and profitability, Celsius enjoys a premium valuation. Its shares trade for a massive 94x forward earnings, compared to just 12x for the average consumer discretionary stock. While such a high multiple would normally suggest overvaluation, there are reasons Celsius may deserve its rich premium.

Growth Outlook Remains Strong

Wall Street expects Celsius’ earnings to leap 53% in 2023, providing justification for its lofty valuation. The global energy drink market is projected to grow at a 9% annual rate to reach nearly $100 billion by 2028, providing a long runway for Celsius’ continued expansion.

Celsius is also expanding beyond its domestic stronghold into new international markets like China and Europe. It has cultivated partnerships with celebrities and influencers like Dwayne “The Rock” Johnson to boost its branding power. The company sees a total global market opportunity of $1.5 trillion across both the energy drink and functional beverage categories.

And Celsius is eyeing new product lines like plant-based protein shakes to drive additional growth on top of its core sparkling drinks. With the business retaining its entrepreneurial ethos despite its recent explosion, all signs point to the growth party continuing.

Big Brother Pepsi Lurking

Celsius’ impressive rise has not gone unnoticed by industry goliaths. In particular, beverage titan PepsiCo (NASDAQ: PEP) has taken an active interest in the upstart brand. Last year, PepsiCo purchased a 7.5% stake in Celsius for $550 million.

Beyond just a passive investment, PepsiCo entered an agreement to distribute Celsius in its extensive bottling and distribution network. Celsius gained access to Pepsi’s expansive retailer relationships, while Pepsi added a fast-growing brand to its portfolio.

The connections between the two companies extend further. PepsiCo executive James Dinkins joined Celsius’ board of directors in 2022. Mr. Dinkins, a PepsiCo lifer who oversees its corporate strategy, brings deep beverage industry expertise to Celsius.

These moves indicate Pepsi views Celsius as far more than a mere financial investment. Rather, it has all the hallmarks of a strategic partnership.

With Coke and Pepsi both seeing slower growth amid shifting consumer preferences, Celsius offers an attractive vehicle for expansion. Its functional energy drinks nicely complement Pepsi’s traditional soda and snack offerings.

All Roads Lead to Acquisition?

The next logical step in the relationship between the two companies would be an outright acquisition by PepsiCo. Celsius would represent a perfect bolt-on acquisition, given the existing ties through their partnership.

PepsiCo certainly has the financial firepower, with over $9 billion in cash on hand and annual free cash flow exceeding $7 billion. It could easily swallow up Celsius’ comparatively tiny $6 billion market capitalization.

And PepsiCo has a long history of successful acquisitions, like its buys of Quaker Oats and Gatorade, which added brands that still drive growth today.

Buying Celsius would allow PepsiCo to capture the full rewards of its surging growth, while also preventing rival Coca-Cola from landing the asset. It can leverage its distribution scale and marketing budget to drive Celsius to even greater heights.

Some may argue PepsiCo would be overpaying by acquiring Celsius at its current valuation. But history shows that premium prices must be paid to lock up the fastest-expanding brands in a category. Iconic investor Warren Buffett proved willing to pay up for Coca-Cola decades ago, and was richly rewarded.

For PepsiCo, making a big bet on Celsius could be the first step toward transforming its portfolio for the future of beverages. An outright buyout may not happen overnight, but all signs point toward Celsius’ brand joining the Pepsi banner long-term.

The Bottom Line

Between its stellar growth, strong positioning and high-profile backer, Celsius remains one of the most compelling stocks in consumer discretionary. It represents an attractive pure-play on the fitness drink megatrend.

And with PepsiCo already heavily invested in Celsius, speculation will only build for an eventual full acquisition. That possibility provides additional upside for shares.

For investors looking to tap into the outperformance of consumer stocks, Celsius provides a unique way to gain exposure to one of the sector’s brightest rising stars. Buying into this hot brand now could pay off in a big way over the long run.

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John Smith is a veteran stock trader with over 10 years of experience in the financial markets. He is a widely followed market commentator known for his astute analysis and accurate predictions. John has authored multiple bestselling books explaining complex market concepts in simple terms for novice investors looking to grow their wealth through strategic trading and long-term investments.
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