Friends,
Energy drink Celsius has been a phenomenal investment. In just five years, sales have jumped 2,400%; the company is now profitable; and up until a few weeks ago, the stock was up 5,400%.
But things started to change recently:
- May 28th: Nielsen came out with a report that -- based on a single week's data -- Celsius' share of the energy drink market dropped from 10.8% to 10.5%.
- June 11th: At a conference, management admitted the energy drink market wasn't growing as fast as expected, and Pepsi (Celsius' North American distributor) was ordering less than many expected to build up inventory.
In isolation, none of these things seem that big of a deal: a week's data? A new distributor of a product is correcting the inventory?
And yet, the stock has fallen as much as 42% on these two data points alone.
Here's the crazy part: the fall actually makes a fair amount of sense.
Within the investing universe, Celsius' moat is narrow. Anyone can come out with an energy drink. The only thing that helps Celsius stand out is its brand power. That's not the company's fault; it's just the price of being in that market.
Growth expectations matter for every company, but they are doubly important when the brand is the only discernable moat.
Based on our calculations (we used a reverse discounted cash flow calculation), here's what changed:
- On May 24th -- when the stock peaked -- the company was expected to grow revenue by 24% annually over the next 10 years.
- By June 27th, the expected revenue growth rate had fallen to 17% annually over the next 10 years.
That's just a few percentage points. Doesn't seem like such a big deal -- does it?
Here's the tricky part: small percentage-point changes, carried out over a decade, make a huge difference.
Over the past year, Celsius has sales of $1.4 billion:
- If it grows by 24% annually, it will reach $12.2 billion by 2034.
- If it grows by 17% annually, it will reach $6.8 billion by 2034.
Full Stop: Those numbers are in totally different universes. Just a 7 percentage-point difference led one number to be almost double the other!
None of this means the future is predictable -- or that Celsius makes a good/bad investment moving forward. It just goes to show -- for highly-valued, low-moat businesses, even the slightest change in expectations can make an enormous difference over the long run.
That's worth remembering.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long Term Mindset
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