This Magnificent Growth Stock Has Skyrocketed Nearly 6,000% in the Past 5 Years: Here’s Why I’m Not Buying It.

If you’re someone who likes to pick individual stocks, your hope — no doubt — is for those companies to outperform a broad index. That’s a difficult task with the Nasdaq Composite up 124%, including dividends, since March 2019.

However, some businesses have been able to absolutely trounce the index. Look no further than Celsius (CELH -0.61%) as proof. The purveyor of functional energy drinks has seen its shares skyrocket 5,870% in just the last five years. This means a $1,000 investment back then would be worth almost $60,000 today.

This beverage stock continues to soar in 2024, benefiting from tremendous momentum. But I’m still not buying it. Here’s why.

Lofty expectations

It’s probably not surprising to know that because of Celsius’ huge price gain, the stock isn’t cheap. It currently trades at a price-to-earnings (P/E) ratio of 119. That’s not a bargain by any stretch of the imagination. For comparison’s sake, the tech-heavy Nasdaq-100 index sells at a P/E multiple of 31 right now.

Despite its growth potential, which I’ll discuss below, Celsius shares are trading at a nosebleed valuation. This indicates the extremely lofty expectations that investors have for the stock today. When the P/E ratio is this high, it adds downside risk to the equation. Should Celsius miss Wall Street revenue forecasts, for example, by even a few million dollars, the stock could crater. Or if management provides weak guidance, shares could tank.

Celsius bulls have probably viewed its ascent similarly to Monster, the $62 billion market cap energy drink rival whose stock skyrocketed 51,000% over the past 20 years. Investors who might have missed that boat aren’t going to miss the chance to own an industry newcomer, which perhaps might help explain the meteoric rise of Celsius’ shares.

Celsius’ tremendous growth

I can’t argue with Celsius’ ridiculously impressive growth over the past few years. Revenue totaled $131 million three years ago in 2020. In 2023, it came in at $1.3 billion.

No wonder the stock has done so well. By focusing on how the company’s energy drinks are positioned from a marketing and branding perspective, mainly as functional beverages that mix natural ingredients with caffeine, Celsius has caught on with consumers in a major way.

The brand is the top-selling energy drink on Amazon, ahead of Red Bull and the aforementioned Monster. That’s an impressive feat. The e-commerce site has billions of visitors each month, providing a wide potential customer base for Celsius.

Another recent development that should help the business is the partnership with PepsiCo. The beverage and snacks giant handles distribution for Celsius both in the U.S. and internationally, a deal that started in August of last year.

This is clearly a business that is firing on all cylinders right now. And it’s doing so in a profitable manner as net income totaled $228 million last year. It’s hard to find any faults in this regard.

The issue, though, is that the market is fully aware of how fantastic Celsius is doing. When expectations are this high, as characterized by the steep P/E ratio, it looks like shares are priced for perfection.

I’m also not so convinced that Celsius has long-term staying power. There are basically no barriers to entry preventing anyone with enough start-up capital from creating their own energy drink. Moreover, consumer tastes and preferences are always changing. Time will tell what the industry looks like a decade from now, but these are just my observations.

Celsius has crushed it for investors in the past five years. From today’s vantage point, though, I don’t think it’s a smart buy.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Celsius, and Monster Beverage. The Motley Fool has a disclosure policy.