🗞 Down ~70%, Can Celsius Turnaround?

Happy Sunday!

Here’s what’s on the docket for this week’s newsletter:

• 💳️ Visa vs. DOJ

• 🕶️ Meta Unveils AR Glasses

• 📊 A Deep Dive into Celsius Holdings

And much more, let’s dive in!

News of the week

• 💼 Visa vs. Department of Justice: On Tuesday, the US Justice Department sued Visa, alleging that the $523 billion payments giant illegally maintains a monopoly on the US debit card market. The complaint highlights that 60%+ of debit transactions in the United States run on Visa’s debit network, which allows it to earn over $7 billion in processing fees each year.

  The complaint alleges that Visa illegally maintains its monopoly by imposing “exclusionary” agreements on merchants, thus preventing US debit card processing from becoming a more competitive market. Representatives from Visa called the lawsuit “meritless” and stated it “ignores the reality that Visa is just one of many competitors in a debit space that is growing.”

  Visa’s stock closed down 3% this week.

• 🕶️ Meta Unveils AR Glasses: On Wednesday, Meta hosted its annual Connect conference where the tech giant unveiled a new set of augmented reality glasses called Orion. While the Orion glasses aren’t yet available to consumers, the capabilities that were displayed seemed highly impressive.

  The glasses will allow users to overlay digital graphics on top of the real world. Importantly, unlike existing VR goggles, these glasses are lightweight and will look much like a typical pair of glasses.

  Meta’s stock was flat this week but is already up more than 60% so far this year as the company demonstrate its resilience in the digital ad market while improving its profitability.

• 💻️ Micron Earnings: Micron, one of the leading global providers of high-bandwidth memory chips, reported 4th quarter results on Wednesday that came in ahead of analysts expectations.

  Micron produces a kind of space-saving memory chip which is critical for GPUs. These have been in high demand thanks to the rise in AI spending as of late.

  Micron delivered $25.1 billion in revenue for the full-year, which was up more than 60% from its 2023 figure. Micron’s CEO Sanjay Mehrotra stated “robust AI demand drove a strong ramp of our data center DRAM products”.

  Micron’s stock closed up 16% this week.

Company Spotlight: Celsius Holdings

In May of this year, Celsius was a $22 billion company seen as the disruptor in a large and growing market for energy drinks.

Fast forward 4 months and today it’s market cap stands at just $7.3 billion.

So what has happened? Why has investor confidence dissipated so much that Celsius lost nearly 70% of its value in a matter of months? Let’s take a look.

1.) Category Slowdown

The energy drink category has hit an inexplicable slowdown.

Over the last few months, the industry which has stolen share from other markets like coffee and soda for the better part of two decades, has suddenly began reporting declines in growth across the board.

During Monster Beverage’s latest conference call, Co-CEO Hilton Schlosberg stated “Historically, in the United States, we have only seen volume declines during the financial crisis and during the COVID lockdowns… The current situation is relatively unprecedented.”

This broad slowdown has left many Celsius shareholders worried that the industry might be reaching maturity much faster than investors were anticipating.

2.) Inventory Hiccup

Another factor weighing on Celsius’ valuation is the recent inventory glut with Pepsi.

At a recent investment conference, Celsius reported that Pepsi, which is their distribution partner and largest customer by a long shot, was pulling back on new orders as it had overbought in late 2023.

Celsius’ CFO mentioned that Pepsi was holding a lot of inventory in late 2023 to ensure that they were keeping all their shelves stocked. But as of late, Pepsi has decided that they could maintain lower inventory levels while still effectively merchandising and keeping the shelves full.

This new order pullback has forced analysts to significantly revise their revenue guidance for Celsius’ upcoming quarter.

3.) Competitive Worries

The longer term worry among most investors rests with the competitive landscape.

Thanks to the rapid rise of Celsius in the US, copycats have begun to surface, and many are actually experiencing some concerning levels of success.

In particular, Alani Nu which employs an eerily similar marketing model and can design to Celsius has been climbing up the market share charts. While still not near the size of Celsius, this begs the question: Does Celsius have a moat?

Conclusion: After the recent drawdown, Celsius currently trades at an EV/EBIT of 22.5x. If the recent demand slowdowns are temporary and Celsius is able to return to 20% growth for the next few years (and maintain its current profit margins or better), investors will likely be rewarded with market-beating returns from here.

Meme of the week

“the company maintains its monopoly power by insulating itself from competition… it wields its dominance, enormous scale, and centrality to the debit ecosystem”

As mentioned earlier, the US DOJ filed a suit against Visa this week for illegally maintaining a monopoly on the US debit card market.

However, while the complaint aimed to discredit the payments giant and highlight some of its exclusionary practices, investors might have had some different takeaways.

The complaint described a business that many investors would likely think attractive. A digital business insulated from competition, with low incremental costs and the ability to retain world-class margins.