Celsius (CELH 0.53%) Shares are up 84% over the past three years (as of August 20). That sounds like an impressive gain, but it’s important to note that the stock has plummeted 58% in the past five months alone. The market may be coming to terms with the company entering a new phase of its life cycle, marked by a more mature profile.

Celsius has likely caught the attention of buy-the-dip investors looking to take advantage of the weakness. Where will this rally lead? Drinks supply in three years?

Expect a slowdown in growth

The most important factor contributing to Celsius’ share price gains has undoubtedly been its tremendous revenue growth. Revenues in 2023 totaled $1.3 billion, a staggering 25-fold increase from 2018 five years earlier. Celsius has leaned on its marketing tactics that emphasize health benefits. And the company has tried to increase the number of retail locations where its products are available to reach more customers and expand its sales base. This plan has obviously worked wonders.

However, growth will slow. In fact, it already has. Sales rose 29% in the first six months of 2024. Management lamented weakness in the energy drink category across the beverage industry. It also doesn’t help that PepsiCoCelsius’s main distribution partner, is reducing its inventory levels.

According to consensus estimates from Wall Street analysts, the company is expected to grow its revenue at a compound annual rate of 23% between 2023 and 2026, a significant slowdown from previous years. I believe this forecast is absolutely reasonable. Companies can’t grow to the moon forever. And in Celsius’ case, the company may have already harvested all the low-hanging fruit in terms of expanding its sales capabilities.

But the bright spot for Celsius lies outside North America. The company began selling its energy drinks in Canada, the UK and Ireland in the first months of 2024, with New Zealand, Australia and France to be added in the second half of this year.

Investors should be encouraged by the fact that the company is very profitable. That’s not usually the case with fast-growing companies like this one. In the second quarter, net income was $80 million, which represents a margin of just under 20%. That’s definitely a bright spot.

Headwinds in valuation

At their all-time high in March, the shares became a ridiculous Price-earnings ratio (P/E) ratio of 126. Due to the steep price decline, shares are now trading at a P/E ratio of 40. Investors who remain optimistic about the company could easily view this as a buying opportunity. If all else remains unchanged, a lower valuation is desirable.

I’m not so sure about that perspective though. At the current valuation, I still believe the stock is highly valued. I think it’s very reasonable to assume Celsius’ P/E will continue to fall from here. Perhaps then it will approach an industry heavyweight Monster BeverageThe P/E ratio is 29. That represents a 28% headwind for investors. At that level, I would take another look at Celsius and re-evaluate the stock.

But that potential price drop might still not be good enough. I also have limited confidence in Celsius’ long-term prospects. Its ultimate success is far from certain. The company operates in an extremely competitive market where consumers have seemingly unlimited choice when it comes to energy drinks. The company’s sales decline could be the first sign that its best days are behind it.

Celsius shares have been a big winner in the past. But I am not so optimistic that this stock will S&P500 in the next three years. Therefore, I am happy to forego purchasing the company.