Celsius Holdings - Increased Risk & Uncertainty

He who covers a transgression seeks love, But he who repeats a matter separates friends.

Proverbs 17:9

Proverbs are very practical with many straightforward words of wisdom for all to read. Being offensive to others never ends well, especially when I’m the one in the wrong. Restoring and reconciling my transgression goes a long way in showing my care beyond myself. Repeating my offense inevitably leads to division and separation, mistrust and bitterness and many other negative consequences.

Sometimes investing can feel like an offense against oneself. Many can relate to the feeling of buying a stock only to see it go down immediately afterward. Or waiting for the ‘right price’ and seeing the stock jump much higher, or even worse, selling out of a position and watching it march higher. Managing investments requires clear goals and objectives and strategies to enable optimal execution. Keeping a practical approach to investing versus heading towards delusion requires an admittance of mistakes, learning from them and improving and refining tools and strategies continually.

The emotional pressures of investing ebb and flow constantly. This places pressure on anyone who enters the market. A major issue that arises repeatedly is companies becoming overvalued which tends to be driven by hype and speculation. Earnings results tend to lead to increased volatility and once the company reports and/or adds new information to the equation, a company can see its stock price gyrate significantly one way or the other.

Earlier today, Celsius Holdings, Inc. (CELH) reported results in line with expectations, but also announced the company’s intent to acquire Alani Nu for $1.8 billion when accounting for the net present value of taxes. This deal propelled the stock substantially higher in after-hours trading.

CELH was a great investment opportunity for any investor that took the risk of owning the stock prior to 2020. Like many stocks, CELH became highly overvalued during the pandemic and greatly benefited from deals struck with Costco Wholesale Corporation (COST) and Amazon, Inc. (AMZN). But it wasn’t until 2021 through 2023 that the deal with PepsiCo, Inc. (PEP) led to three consecutive years of greater than 100 percent growth. By the first half of 2024, CELH found itself in a position where it really could do no wrong, as the valuation level had moderated based on financial performance.

Since the peak in 2024 it’s been a rough time with the company peaking towards $100 per share only to crater all the way down to $21 reflecting a 78 percent drop. The 35 percent after-hours pop serves as a form of reassurance that better days are ahead, and while I agree that CELH would have gotten back to double-digit growth even without the Alani Nu deal, the timing of the acquisition does raise some questions and concerns.

At the end of the day, we’ll see how much goodwill hits CELH’s balance sheet, but historically, deals that are higher than a company’s revenue does not bode well. This is especially concerning for a company like CELH that has maintained a pristine balance sheet with $890 million in cash and investments and essentially no debt. Once the deal is complete, CELH will have absorbed $900 billion in debt, will have used $375 million in cash for the transaction, and will have net debt remaining of $385 million, or 1.5 times estimated operating cash flow for 2025. The company doesn’t have a capital-intensive capital structure so this added debt will be expected to be paid down quickly.

The timing of the deal is concerning as CELH witnessed three consecutive years of greater than 100 percent growth, only to see 2024 growth slow to less than three percent. Management stated that there were impacts from the timing of orders from CELH’s largest distributor, PEP, and increased promotional activity and incentive programs. While proponents of CELH will argue synergies with Alani Nu and PEP to grow revenues further, we must consider whether CELH independent of Alani Nu felt pressure to perform for PEP to assuage any slowing growth concerns on their end. Investors will also need to pay close attention if CELH turns into a growth-by-acquisition company which would signal stagnation of organic legacy segment performance.

Margin contraction is another concern as CELH integrates Alani Nu into its operations. Prior to the deal, CELH witnessed a peak operating cash flow margin at 14 percent. I suspect that this margin will modestly contract that will lead to a slowing of cash flow growth from the new baseline established in 2025. In a best-case scenario contraction would only drop towards 12 percent.

One of the biggest concerns of post-deal is valuation. CELH boasted of purchasing Alani Nu at less than three times EV/Sales and 12 times EBITDA, which doesn’t help greatly for operating cash flow. With the stock price jumping towards $35, CELH is trading ahead of itself where it should be in 2026. I’m modeling CELH to generate around $2.2 billion in revenue for 2025 including the Alani Nu revenue, a 60 percent jump, and thereafter, I’m still giving CELH annualized double-digit revenue growth through the mid-term period. At 30 times operating cash flow per share, this places a stock price target at $43 by 2029. If CELH growth slows below double-digit performance, the operating cash flow multiple can easily contract well below 30 times cash, which is double the price CELH paid for Alani Nu.

Retail investors need to really think about these issues and concerns as CELH may end up in a worse position than prior to the deal; an unfortunate circumstance that occurs far too often companies making large deals soon find out.

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