[00:02:41] Shawn O’Malley: The logo itself does deserve some mention, it has remained unchanged for over two decades and it’s easily one of the most recognizable products out there, especially in the beverage industry. It really creates a feeling of mystery and intrigue that has clearly resonated with people. Even just the sinister font used to write out the word monster is pretty identifiable.

[00:03:01] Shawn O’Malley: Obviously, the product itself has to be appealing too, but the product design is something of a masterpiece in marketing, with a bunch of easter eggs hidden in that design. Monster Beverage hasn’t always been about energy drinks though, and it hasn’t even always been called Monster. The original company was actually founded as Hanson’s in 1935, selling juice products, and it didn’t rename itself Monster Beverage until 2012.

[00:03:24] Shawn O’Malley: The story starts pretty humbly in Southern California with Hubert Hanson and his three sons selling juice to film studios and local retailers. They loaded up an old flatbed truck and drove down dusty roads with heavy crates of juice during the Great Depression to deliver to their customers. It stayed a family business for years, and in the 1970s, Hubert’s grandson, Tim Hansen, took over control of the company and developed a handful of sodas and juices to market under the Hansen brand.

[00:03:50] Shawn O’Malley: After the company fell into bankruptcy in 1988, it was acquired by two South African billionaires, Rodney Sachs and Hilton Schlossberg, and renamed Hansen Natural Company. Those two have actually run the company ever since with restructured leadership and a fresh investment into the business to help turn things around and brought the company to IPO in 1990, but it wasn’t until after more than six decades of existence that Hanson’s launched its first energy drink in 1997.

[00:04:18] Shawn O’Malley: It was at least partly a story of being in the right place at the right time as America embraced the Internet and rapid technological change, energy drinks became a popular and fitting addition to many people’s lives. The Monster Energy drink known and loved today would be released in 2002 and it leaned heavily into a surge of patriotism and support from the military following 9 11.

[00:04:39] Shawn O’Malley: That branding helped Monster gain a cult following and its products have held onto impressive market share ever since. So Monster Energy really changed the company’s trajectory. In 2001, the company made just $92 million in revenues, and in over two decades, sales grew to over $7.1 billion last year.

[00:04:58] Shawn O’Malley: That is a compounded annual growth rate of 20% per year. Nick Modi of RBC Capital Markets had this to say about monster energies rise to CNBC quote. They built it the right way. They were very slow and methodical and how they built the distribution of the brand. Making sure it was strong in every market that it was in and every retailer that was in it was getting good velocity.

[00:05:20] Shawn O’Malley: So it’s a brand now that people are just really passionate about. There’s a whole subreddit with over 40, 000 members devoted to just showing off their can collections and discussing their flavor preferences. It’s funny how a single product success can completely change the face of a company. I’m going to guess that Hubert Hansen in 1935 had no possible clue that his little family juice business would become one of the largest energy drink companies in the world in the 21st century under a completely different name.

[00:05:48] Shawn O’Malley: Monster Beverage employs some 6, 000 employees across the globe now, thanks largely to rolling that success with Monster Energy Drinks into related product lines. It’s also worth mentioning that Monster has been a controversial product. There have been a few different scandals connected to it, premised around it basically having too much caffeine and therefore being too dangerous.

[00:06:07] Shawn O’Malley: I am evidently not a medical expert, but the consensus seems to be that, like anything really, Monster is safe in moderation. Each can has two servings worth of liquid, and the total caffeine content in a can is around 160 mg. For reference, a single 8 oz cup of coffee has about 95 mg of caffeine, so a full can has around the same caffeine as between 1 and 2 cups of coffee.

[00:06:30] Shawn O’Malley: Despite some instances of people dying from cardiac related issues after consuming the drinks, these cases have largely involved underlying conditions, and the European Food Safety Authority has concluded that reasonable consumption of Monster and other energy drinks is safe and unlikely to interact adversely with alcohol or the other ingredients in its drinks.

[00:06:47] Shawn O’Malley: And a 2013 U. S. Senate hearing on energy drink risks has resulted in no changes to the industry. However, some countries already have in place bans that restrict energy drink sales to anyone below a certain age, usually either 12 or 18, depending on the country. So there is definitely a risk of further regulation and restrictions, and that is one of the things that bears like to point out about the stock.

[00:07:10] Shawn O’Malley: Proposed legislation has ranged from excise taxes making energy drinks more expensive in certain areas, to limits on how much caffeine can be included in a single drink, which might make them less appealing to some customers. I’ve tried Monster, but that much caffeine just isn’t for me, personally. I don’t even really drink coffee though, so I am a biased audience.

[00:07:29] Shawn O’Malley: That said, I can understand why people love them. There are plenty of people who aren’t particularly sensitive to caffeine side effects, who like the flavor, and who find that the drinks keep them energized and focused throughout their days. I would never encourage anyone to drink energy drinks, but again, I see why they exist.

[00:07:44] Shawn O’Malley: Caffeine is ultimately a highly addictive drug, even if it’s quite normalized, and anyone investing in the company would have to come to terms with that. Because caffeine is so addicting, Monster is arguably a consumer staple company, as opposed to being a consumer discretionary one. In a recession, people are almost certainly not going to cut back on their caffeine consumption.

[00:08:02] Shawn O’Malley: There’s probably a long list of things the average Monster consumer would cut spending on before they gave up their Monster energy drinks. For many, it’s their equivalent of a morning coffee habit, except with Monster, there’s not an option to make it yourself at home. It might not be as much of a staple as something like toilet paper, as there are some substitutes for Monster, but I don’t think it’s a stretch to lump Monster into this category either.

[00:08:23] Shawn O’Malley: Monster’s CEO actually frames the product as a quote, affordable luxury. After Monster Energy had made a lasting impact on the beverage industry, it caught the interest of beverage giant Coca Cola. Coke and Monster entered into a strategic partnership in 2015, and Coke purchased a 16. 7 percent stake in the company for over 2 billion.

[00:08:43] Shawn O’Malley: Which has grown to more than 20 percent today due to buybacks. Coke became Monster’s preferred global distribution partner, and they traded ownership of a few brands, too. Monster received Coke’s energy drink brands, NOS, Full Throttle, Burn, and Relentless, while Coke got Hansen’s Natural Sodas, Peace Tea, and Hubert’s Lemonade.

[00:09:01] Shawn O’Malley: From Coke’s perspective, swapping brands and investing in Monster was an efficient way to gain exposure to the growing market for energy drinks, While Monster was quite pleased to get access to Coke’s industry leading distribution networks, in the beverage world, what really prevents some popular products from going mainstream is distribution.

[00:09:18] Shawn O’Malley: Over decades, this is something companies like Coke and Pepsi have really come to dominate, and if you can’t get space in their distribution networks, since trucks can only carry so many drinks at a time, Then there’s little hope of your product finding nationwide or worldwide success. Distributors are almost like a brand sales team working to establish relationships with retailers and to ensure inventories end up where they’re supposed to go.

[00:09:40] Shawn O’Malley: So Monster’s relationship with Coca Cola gives it a pretty meaningful competitive advantage over smaller brands. Monster investors did panic a bit though, in 2018 when Coke announced that it was planning on releasing energy drinks under its own brand name. While Monster and Coke’s original partnership deal restricted Coke from competing in the energy drink category, it was permitted to do so with certain exceptions.

[00:10:02] Shawn O’Malley: But Coca Cola Energy, as it was called, was short lived and was discontinued in North America in 2021. Today, Monster remains focused on the energy drink business, with a range of brands targeting different niches. You might recognize some of them, like Reign, spelled R E I G N. and Bang, as well as Predator Energy and Full Throttle.

[00:10:20] Shawn O’Malley: Bang, for example, targets a very different audience than Monster. Its website pops with colors of pink and purple, pictures of chic female influencers, and flavors like radical skedaddle and sourheads. It’s got a fun, almost 1980s era feel to the marketing, while Predator Energy takes a pretty different approach.

[00:10:39] Shawn O’Malley: The website is dark and welcomes you with a short video of its flaming tiger logo and offers flavors like Mean Green and Purple Rain. It is meant to deliver greater value and targets more price sensitive consumers. Another one of its brands, Torwater, is marketed as the quote, original backstage water, and its cans are adorned with art that resembles the posters you might see at a rock and roll concert.

[00:11:01] Shawn O’Malley: It is literally just water, but in a cool can, so you don’t feel insecure about not drinking something sexier. And then there’s Monster’s Canarchy brand, which has 585 employees and brews a variety of drinks like hard tea and hard seltzer. This includes some recognizable drinks like Hiawai and Dale’s Pale Ale.

[00:11:18] Shawn O’Malley: But that’s sort of the lay of the land with Monster’s product lines. I’ll just mention what the competition looks like too. Obviously, there’s Red Bull, but the other big player in this market is PepsiCo, with their Rockstar line of energy drinks. Energy drink companies earned about 21 billion in sales globally last year, with Monster and Red Bull being the two biggest companies in the space, holding between 20 and 30 percent of the combined market share, depending on how you define the market size, either in terms of sales volumes or sales dollars, and what types of drinks you classify as energy drinks.

[00:11:49] Shawn O’Malley: Pepsi’s share is below 10 percent and the remaining market is captured by other brands like Celsius and Ghost. You might also argue that the addressable market for energy drinks has some overlap with coffee consumers. So in some ways, coffee also competes against Monster, especially for the types of canned coffee drinks featured near energy drinks in stores.

[00:12:07] Shawn O’Malley: But Monster does have its own line of canned coffee energy drinks called Java Monster. Monster also primarily competes in the U. S., which is where about 60 percent of its sales come from, though it distributes its products across 142 countries. So there is considerable opportunity to try and change consumer habits worldwide by introducing and popularizing energy drinks in new markets, but there is, as always, no guarantee that Monster will catch on in popularity like in the U.

[00:12:32] Shawn O’Malley: S. And while Monster has ventured into other areas like alcohol, its energy drink business still represents more than 90 percent of its sales. But consumption habits around energy drinks have really changed considerably in recent years. What was once considered something primarily relied upon by college students cramming before a test has very much gone mainstream.

[00:12:51] Shawn O’Malley: People sip them casually at concerts, on the way to work at the gym, and anywhere really. And energy drinks purporting to have certain vitamins, electrolytes, and other health benefits have caught on with specific consumer niches as well. So energy drinks broadly have come to represent about 20 percent of the overall beverage industry.

[00:13:08] Shawn O’Malley: This growing popularity also means more and more brands piling into the space, which will continue to pressure profit margins. So Monster’s profit margins have held up well so far, which is a testament to its brand power and customer loyalty. Its gross margins are at 53.5%, just a hair below where they were in 2014 at 54.4%, and its net profit margin has actually risen over that same period from 19.6% to 28.2%.

[00:13:36] Shawn O’Malley: Celsius is one of those brands that has really broken through in recent years and has a quite different feel from Red Bull or Monster. It’s not about extreme sports and isn’t intensely masculine. You might say it doesn’t even really look like an energy drink. The company completely reinvented itself after teetering on the verge of bankruptcy a decade ago and is now worth around 9 billion.

[00:13:56] Shawn O’Malley: While Celsius is going after different customer segments, it’s hard not to see the fastest growing company in the energy drink space as a threat. Celsius promotes itself as more of a functional beverage and health supplement, and in its early days it framed itself as something of a magic weight loss drink to combat the obesity epidemic.

[00:14:14] Shawn O’Malley: Celsius has much stronger appeal with women than Red Bull or Monster, and combined with its fit image, it’s the type of drink you might see at a SoulCycle class. Similar to how Monster has partnered with Coke, Celsius has partnered with Pepsi, so Celsius, I think, is a significant player in this space to keep an eye on.

[00:14:30] Shawn O’Malley: In terms of the economics of the business, Monster outsources key processes to third parties like bottling, packaging, and distribution. So that leaves Monster responsible for designing flavors and marketing its products, as well as purchasing the raw ingredients, flavors, juices, cans, bottles, and caps that are used for its products, which are then delivered to bottlers and packagers.

[00:14:49] Shawn O’Malley: In 2016, monster took more direct control over its production of flavors by acquiring the American Fruits and Flavors Company for $690 million, which had supplied monsters flavors for 20 years. The deal enabled Monster to take ownership of intellectual property related to flavor development in its products.

[00:15:07] Shawn O’Malley: Monster Energy breaks its business into three primary reporting segments. The largest is its Monster Energy segment, which includes its signature Monster drinks as well as Bang. Monster’s second segment is what they call their strategic brands unit, which includes the various drink brands acquired from Coca Cola in 2015.

[00:15:23] Shawn O’Malley: This unit primarily generates revenues by selling concentrates and or what you might call beverage bases to authorized bottling and canning operations. Such bottlers generally combine the concentrates with sweeteners, water, and other ingredients to produce ready to drink packaged energy drinks. The ready to drink packaged energy drinks are then sold to other bottlers, full service distributors, or retailers, which includes grocery chains, wholesalers, convenience stores, drugstores, e commerce retailers, and even the military.

[00:15:49] Shawn O’Malley: The third unit, which is really quite small, is its portfolio of alcohol brands. Monster has really only just dipped its toe into this area, but its sales of alcoholic drinks did grow 80 percent from 2022 to 2023. It’s worth taking a moment to explain what bottlers do. Beverage bottlers prepare, fill, seal, label, and distribute beverages for sale.

[00:16:09] Shawn O’Malley: They also ensure quality control and compliance with regulators like the FDA. The bottling process involves cleaning and sterilizing bottles, mixing drink ingredients, filling them, sealing them, labeling them, and packing them for distribution. Bottling lines often include equipment for applying labels, capping, date stamping, and quality assurance verification.

[00:16:29] Shawn O’Malley: Many bottling companies are actually franchisees of Pepsi and Coca Cola, and Coca Cola has its bottling operations split into separate companies. You try to look up the Coke stock, you’ll find that there are two different listings, one with the ticker C O K E and one with the ticker K O. The first one is actually the company that does bottling for Coke products and other beverage brands, whereas the second one, ticker K O, is the company that owns the intellectual property for Coca Cola and is what people usually reference when they talk about the Coca Cola company.

[00:16:58] Shawn O’Malley: But Coca Cola actually has over 250 bottling partners worldwide. And funny enough, the vast majority of delivery trucks plastered with the Coca Cola logo actually belong to bottling companies that license the logo, not the true Coca Cola company with the stock ticker KO. The bottlers undoubtedly have the worst end of the deal, as they have to purchase and maintain manufacturing and distribution equipment while also having to pay companies like Coca Cola and Monster a vast portion of their income.

[00:17:25] Shawn O’Malley: Similar to how the parent company that owns the intellectual property for Coca Cola realized it would be more profitable to outsource bottling and distribution to separate companies, rather than taking on those logistics within their own business, Monster has followed that same playbook. Part of Monster’s business has been to become something of a trademark bully too.

[00:17:43] Shawn O’Malley: They’re understandably very protective of their brand, so they’ve been known to launch no shortage of often frivolous lawsuits that they usually lose. This does send a powerful signal, though, to anyone who might seriously consider infringing upon their intellectual property. Monster has over 21, 000 trademarks worldwide, and it’s obviously keen to protect them.

[00:18:02] Shawn O’Malley: Marketing is also a big component of building and protecting its brand, too. They largely focus on reaching their target audience of younger, typically more blue collar consumers through promotions of extreme sports, from F1 racing to MMA, gaming, and bull riding, helping the brand become more emblematic of a certain lifestyle.

[00:18:19] Shawn O’Malley: This is actually quite similar to Red Bull’s influencer led strategy, where extreme sports athletes are paid to recommend and drink the beverages. But Monster isn’t sold in bars, as has become so popular with vodka red bull cocktails and it isn’t really marketed on TV. Monster’s focus is on what can be accomplished by drinking their products and letting the product speak for itself.

[00:18:39] Shawn O’Malley: There is actually very little capital tied up in the operations of the business, since Monster Beverage is a holding company for each of its different brands. From the top down, Monster Beverage’s job is primarily to manage and market these different brands to consumers. If What’s also attractive about this business is that once a hit drink has been successfully brought to market, there aren’t really any incremental updates needed.

[00:19:00] Shawn O’Malley: Technological companies essentially have to upgrade their offerings every quarter or every year, yet that’s not really the case in the beverage industry. There is a lot of effort that can go into launching new brands and testing those products, But it’s not like they have to reinvent the formula for Monster energy drinks every six months either.

[00:19:15] Shawn O’Malley: Compared to other consumer brands, part of what has enabled Monster to generate such stellar returns is that it’s so asset light, doesn’t have any manufacturing facilities, and it doesn’t have to distribute its products either thanks to Coca Cola. They have been able to take this master monster brand and reformat it across a number of segments in the beverage industry to their benefit.

[00:19:34] Shawn O’Malley: Determining the outlook for a consumer facing brand like Monster can be hard. There are things that are out of their control, like the cost of aluminum or sugar, as well as regulations that can limit where and to whom they can sell their products. On top of that, there are also competitive dynamics, as in will energy drink companies undercut each other excessively for market share such that everybody in the industry is a loser or will there be an equilibrium of task occlusions where each drink maker sort of carves out their own customer niche.

[00:20:01] Shawn O’Malley: In my opinion, one of the best and most reliable ways to assess business quality is in pricing power. If a brand raises its prices, you’ll see real quickly just how much customers care about it. If it raises prices and a competitor’s sales promptly see an unexpected surge, then you know that the product’s loyalty and positioning is weak.

[00:20:19] Shawn O’Malley: Companies that can raise prices to a degree that actually boost profit margins without an offsetting decline in sales volumes have pricing power, and the ability to do that encapsulates a confluence of factors, from effective marketing to product quality and brand perception. On that point, Monster plans to raise prices for its core products by 5 percent across the board starting in November, so the fact that they’re confident about doing that tells you something about how management thinks about the company’s pricing power, though obviously we’ll see what happens when the hikes are implemented.

[00:20:47] Shawn O’Malley: A challenge for Monster is that with its blue collar reputation, it doesn’t have the same premium customer base as Red Bull does. At Walmart, a 12 pack of Red Bull sells for 21. 8 cents per fluid ounce, more than double what Monster charges at 10. 4 cents per fluid ounce for a 12 pack. It’s customer base may be less willing or less able to absorb price hikes to the same degree, which is a hard limit on pricing power for Monster.

[00:21:10] Shawn O’Malley: Monster has also already raised prices a decent bit in the past few years, in part due to higher aluminum prices. In September 2022, it did a broad 6 percent increase in prices. However, since 2020, its gross profits, which is just revenue minus cost of goods sold, has declined more than 5. 5 percentage points from 59.

[00:21:27] Shawn O’Malley: 2 percent to 53. 7%. If I were a shareholder in the company, I would find that pretty concerning. You want to see that Monster is at least able to maintain gross margins by passing on input costs to customers. Instead, it seems like input costs are rising faster than they can raise prices. From March 2023 to March 2024, Monster’s cost of goods sold rose 8. 8%. Higher fuel costs, freight rates, aluminum and sugar prices, and warehousing costs have been particularly challenging in recent years. Again, this is evidence that inflation for the inputs into its drinks are weighing on Monster’s profitability. Some of the decline in gross profits is attributable to its new brands, especially its alcoholic drinks which are costlier to produce, but still, I have some concerns about Monster’s pricing power.

[00:22:11] Shawn O’Malley: Compared to Celsius though, Monster does have stronger and more stable gross margins. Monster’s gross margins are actually roughly in line with Pepsi’s, which both trail Coca Cola, but Monster’s margins are a few percentage points higher than other beverage conglomerates like Constellation Brands and Anheuser Busch.

[00:22:27] Shawn O’Malley: Monster will really have to compete fiercely to defend those higher margins, and it may have to raise prices considerably to do so. If not, inflation and competition will continue to erode away its profitability. Not only does Monster compete for the attention of end consumers, they’re also competing with other brands, for retail shelf space, and even for priority amongst bottlers and distributors.

[00:22:49] Shawn O’Malley: Bottlers and distributors may work with a number of beverage companies, and ultimately, they have limited bandwidth, so it’s critical for Monster to preserve those relationships. In a way, it doesn’t really even sell products to end consumers. Monster technically derives 87 percent of its revenues from sales to bottling and distribution companies that then sell the products to retailers, which are then the ones to sell the products to customers.

[00:23:11] Shawn O’Malley: Obviously, Monster is catering to the end consumer, but Monster’s direct customers are actually bottling and distribution firms. These are almost entirely bottling companies associated with Coca Cola, though it does in some cases sell directly to wholesalers like Costco and Walmart. I think we’ve mentioned a number of the risks affecting Monster the most already, but clearly its business depends hugely on Coca Cola’s bottling and distribution partnerships.

[00:23:35] Shawn O’Malley: Because Coca Cola has a large stake in Monster, as well as stakes in the bottling companies that distribute its and Monster’s products, Coke’s interests should be aligned with Monster’s, especially since they have a non-compete agreement in place, but you just never know. It’s impossible to know the details without going through their partnership arrangements with a lawyer, which isn’t public information, but I have to say it’s surprising to me that Coke did try and launch its own line of energy drinks briefly, and that that somehow didn’t violate the non-compete arrangement they both had in place.

[00:24:02] Shawn O’Malley: I suppose if the products were targeted at a sufficiently different demographic, despite being an energy drink still, Monster might not have been too threatened by that, but it’s enough to make you question Monster’s reliance on Coke’s distribution network. On the flip side, the relationship with Coke is almost certainly a huge advantage for Monster, so there’s always the risk that Coke may want to distance itself from Monster, especially if for some reason energy drinks really came under public scrutiny.

[00:24:27] Shawn O’Malley: Here’s a line from Monster’s financial filings outlining the risk of its dependence on Coca Cola. It says, quote, While we believe that these agreements incentivize the Coca Cola company to take steps to ensure that our products receive the appropriate attention in the Coca Cola company’s distribution system, disagreements as to the interpretation of these provisions in such agreements have arisen and may arise in the future.

[00:24:49] Shawn O’Malley: And there is also the regulatory risks on top of this and the competition we’ve already discussed, as well as the rising input costs from just inflationary pressure generally. On top of that, there’s some concern over management succession planning. While Sachs and Schlossberg, the two South African billionaires who have steered the company for more than three decades, have done a wonderful job, They have not outlined who will run the company after them.

[00:25:12] Shawn O’Malley: Within both in their 70s now, it’s an increasingly pressing question for investors. Having brought the company out of bankruptcy, they have evidently had transformational success with the company and effectively navigated Monster Energy’s hit success. They caught lightning in a jar, so to say, and you can easily imagine that less competent management would not have built a 50 billion company out of that single product’s success.

[00:25:34] Shawn O’Malley: Management succession then is such an important thing to do well and an investment in the company today carries some hope that this will go over smoothly, which is by no means guaranteed. And looking at the most recent quarterly results from Monster, some other challenges have reared their head too.

[00:25:50] Shawn O’Malley: The stock sold off 12 percent on what investors saw as pretty disappointing results earlier this year. It missed on both revenue and earnings estimates and warned that the energy drink market was experiencing lower than expected growth rates. Transcribed The question is whether this is just a temporary blip or part of a more structural trend.

[00:26:06] Shawn O’Malley: This quarter’s past slowdown at least was blamed on reduced foot traffic at convenience stores where Monster makes a lot of its sales. It actually lost a full percentage point of its market share from last year for energy drinks at gas stations and convenience stores. According to co-CEO Hilton Schlossberg, this was a trend that hit a number of beverage and consumer packaged products companies as customers frequented more discount retailers like dollar stores.

[00:26:28] Shawn O’Malley: As there has been so much speculation lately about a recession coming or already having arrived, Schlossberg’s commentary plays into that idea, or at least that a growing portion of consumers are feeling financially pinched. Still, Monster sold about 212 million cases of drinks last year versus expectations of 215 million.

[00:26:45] Shawn O’Malley: Monster’s other co-CEO, Rodney Sachs, told investors on the earnings call that quote, we are a blue collar brand and our consumers are more hard pressed than consumers in other categories. So, as we’ve talked about, the addictive nature of energy drinks makes them less cyclical than other consumer products, yet Monster doesn’t fully reap those advantages since its customer base is more price sensitive than others in the industry.

[00:27:09] Shawn O’Malley: Here to date, Monster is down over 20 percent at the time I’m recording this, but that still doesn’t necessarily mean it offers good value yet. Whenever a company with a good track record like Monster falls 20 percent and hits a 52 week low, it definitely catches my attention. But that doesn’t guarantee that the stock is cheap if it has fallen for other good reasons.

[00:27:27] Shawn O’Malley: At a price to earnings ratio of 28, Monster still isn’t screamingly cheap, but its average revenue growth rate of 13 percent per year over the last 5 years certainly helps to justify its valuation. At a price to earnings ratio of 38, for Celsius, Celsius is arguably more attractive given the incredible growth it’s seen.

[00:27:45] Shawn O’Malley: Celsius 5 year compounded annual revenue growth rates come out to an eye popping 90%. And its management bragged in its most recent earnings call that Celsius was taking market share away from Monster. What I do really like about Monster though is its track record and generating strong returns on capital.

[00:28:01] Shawn O’Malley: Over the past decade, Monster’s return on invested capital has been on average twice that of companies like Coca Cola, Pepsi, Anheuser Busch, and Constellation Brands, which sells Corona and Modelo. And those returns have been relatively stable, even as Monster has grown to become a peer with some of these major beverage companies.

[00:28:18] Shawn O’Malley: What I also love about the company is how financially conservative it is. It can be really tempting to juice returns with borrowed money. Borrowed money can be like jet fuel, enabling you to accelerate promotional spending and hire more employees, but it introduces the possibility of catastrophic risks.

[00:28:34] Shawn O’Malley: That is, from an investor’s perspective, the worst thing that can happen is that a stock goes to zero, and it’s pretty uncommon for a stock to go to zero unless the company has debt that it can’t pay, and which forces it into bankruptcy. Monster has negative 800 million dollars of net debt, meaning it does have some debt outstanding, but it has considerably more cash on hand than debt, and it could promptly pay back all its debt if it wanted to.

[00:28:56] Shawn O’Malley: That makes the risk of default very low, considering that Monster’s operations are also quite profitable. Monster has also been an avid repurchaser of its own stock. Earlier this year, Monster repurchased 5. 6 percent of its outstanding shares in a massive 3 billion deal that it primarily financed with its own cash as part of a tender offer to shareholders.

[00:29:14] Shawn O’Malley: And then in the open market in that same quarter, Monster spent another 100 million buying back stock at a share price of 49. So, at around 45 per share, the stock is trading at a modest discount to where the company’s management found it to be attractively priced. But plenty of companies do buy back shares at too high of a price, so the prices Monster has paid for its own stock aren’t necessarily a sign that it’s trading below its intrinsic value, but still it’s nice to see that management is focused on returning cash to shareholders.

[00:29:42] Shawn O’Malley: Over the years, Monsters Management hasn’t been shy about strategically making repurchases when they felt the stock was cheap either. They repurchased 2. 2 billion worth of stock in 2016, 1. 3 billion in 2018, and 770 million worth in 2022. Repurchases have also considerably outpaced issuance from stock based compensation, so management has been working to reduce the total shares outstanding, which increases the remaining shareholder slice of ownership in the company.

[00:30:09] Shawn O’Malley: Thinking about Monster’s valuation depends really on the story you want to tell about the company. I could easily paint a rosy picture based on the opportunity to expand into new markets as per capita energy drink consumption of the rest of the world follows trends in the UK over the past decades. I could also just as easily tell a story about how Monster’s market share in the U.

[00:30:27] Shawn O’Malley: S. and Europe has steadily eroded over time, while Monster fails to gain traction across Africa and Asia. War competition is definitely limiting Monster’s ability to grow in the U. S. and Europe, but its market share isn’t collapsing either. If anything, Monster’s resilience is a real testament to its loyal customer base, which is pretty rare across the food and beverage industry.

[00:30:48] Shawn O’Malley: But Monster will not get the double digit growth its investors have become accustomed to by continuing to focus primarily on these two markets. And on that point, I wonder if Monster’s branding doesn’t exactly go over well in more socially and religiously conservative countries. Places like Saudi Arabia, Egypt, and Malaysia may not be particularly fond of Monster’s sinister branding.

[00:31:08] Shawn O’Malley: So I think Monster is going to have to tap into its other brands to have success in some emerging markets. The upside is that Monster has the resources and experience to potentially do quite well in formulating brands that resonate in different corners of the world. But the downside is that the company’s line of Monster Energy Drinks is what has a real competitive advantage in terms of its name and recognition and loyalty.

[00:31:29] Shawn O’Malley: In new markets with newer brands, Monster is closer to level footing with established competitors like Celsius and with local brands. In some markets though, it has done quite well. For example, over the last year, the energy drink market in Mexico grew 20 percent and Monster sales there grew 18%. It was a similar story in Brazil, where the energy drink market also grew around 20%, and Monster sales actually grew even faster at roughly 30%, meaning Monster claimed more market share there.

[00:31:54] Shawn O’Malley: Monster has a pretty huge market share in Brazil already too, claiming almost half of all energy drink sales. The picture is pretty similar in Argentina and Chile as well. Monster has done an exceptional job expanding across Latin America. Even in some developed markets, like Great Britain, Monster has gained several percentage points of market share over the last year but declined modestly in countries like Spain and France.

[00:32:18] Shawn O’Malley: In Africa, its market share moved consistently in the right direction too. It gained 5 percentage points of market share in Kenya, and 2 percentage points in Nigeria. And in Japan, energy drink sales generally fell 5 percent year over year, but Monster sales grew more than 4%, which is really impressive to do with sort of a structural headwind in that industry.

[00:32:36] Shawn O’Malley: Lastly, in China, sales grew by 25 percent from 2023 to 2024, which leaves a lot for Monster to be optimistic about given that the Chinese market is so huge. So there is certainly room for the Monster brand to continue expanding internationally, but as I said, I would be cautious in my assessments of that growth because Monster could face branding challenges that its competition doesn’t in a number of key markets.

[00:32:57] Shawn O’Malley: Ultimately, though, my biggest issue with Monster is its valuation. To make the point, let’s go through a simplified hypothetical. Pepsi, which is one of the most dominant and diversified food and beverage companies globally, and which has been popular for almost a century, has a market value of a little more than five times Monster’s, which competes almost exclusively in the energy drink market.

[00:33:17] Shawn O’Malley: I would say growing to a size comparable with Pepsi and Coca Cola is probably the maximum possible bullish scenario for Monster. And even in that almost absurdly optimistic case, from current levels, the stock would only be a 5 bagger, meaning you’d make 5 for every 1 or so invested. To be clear, in no way do I think Monster is on that sort of trajectory.

[00:33:38] Shawn O’Malley: The energy drink market just isn’t big enough, and Monster hasn’t proven its ability to diversify into other areas. You might be able to rationalize Monster’s stock doubling in the next few years, but even so, I don’t think the potential upside outweighs the downside risks. As Celsius surges in popularity, and Monster continues to struggle to pass on higher input costs to customers, or worse, gets into a price cutting war with Celsius, Monster’s valuation would get slashed dramatically even after its declines already this year.

[00:34:06] Shawn O’Malley: When I think about breaking down Monster’s business to its simplest possible explanation, Monster is a company that designs flavors. Its portfolio of flavors, namely its line of existing Monster Energy drinks, underpinned its branding and sales. But for the company to turbocharge its growth, it must continue to design exciting new flavors that appeal to customers across different geographies, demographics, and psychographics.

[00:34:29] Shawn O’Malley: And then on top of designing flavors, Monster’s business model is about marketing those flavors. If you listen to any of the company’s earnings calls with management, you’ll see what I mean. There is just a ton of emphasis on flavors, how various flavors are performing, which flavors are being debuted in new regions, which flavors they’re most excited about, and so on.

[00:34:47] Shawn O’Malley: Caffeine is a commodity, but flavors and branding include a differentiating degree of expertise. There is a reason to continue being optimistic about Monster, it’s because they’re so skilled at creating new flavors. They really have a strong grip on what types of flavors will resonate with their customers.

[00:35:03] Shawn O’Malley: Jumping over to the energy drink subreddit shows that firsthand, energy drink connoisseurs rave about the spectrum of great tasting flavors that Monster offers compared to other energy drink brands. Between 35 and 40 per share, I’d start to get pretty interested in Monster, but that would be a further decline of between 15 and 25 percent from today’s price levels.

[00:35:23] Shawn O’Malley: In that range, you’d be getting one of the strongest beverage brands in the world with promising international growth, a price to earnings ratio of around 23. 5, and a track record of double digit sales growth over just about any time period from 1 to 20 years. On top of that, you’re getting savvy managers with a penchant for tactical share repurchases, no net debt, and Monster’s deeply intertwined relationship with Coca Cola.

[00:35:45] Shawn O’Malley: If Monster successfully raises prices this November and is able to increase its gross margins without too much pushback from consumers, I might consider revising that price target considerably higher, especially if Monster’s growth internationally can offset market share losses and consumer weakness in the US.

[00:36:01] Shawn O’Malley: With those developments, I might be able to justify a share price of around 45 per share. There is a price at which just about any company becomes attractive, and given the competitive headwinds facing Monster, plus the fact that it is by no means a cheap stock even after hitting 52 week lows recently, those are pretty reasonable price targets, I think.

[00:36:19] Shawn O’Malley: It’s definitely a high quality company worth keeping an eye on and I’ll be really curious to see how the energy drink wars continue to unfold and whether Monster has much success diversifying into other product areas like alcoholic beverages. Otherwise, I have trouble getting too excited about it. And with that, that wraps up my coverage today of Monster Beverage, one of the best performing stocks of the 21st century.

[00:36:40] Shawn O’Malley: It’s such a fun story to dig into, and I hope you all enjoyed the episode as much as I did researching it. For context, I am not a shareholder in Monster, and I’m not actively planning to initiate a position in the company, but it is on my watch list. I think it’s important to just have a list of high quality companies that you’ve done the work to understand, so that when a big sell off comes, you have some conviction in acting boldly while others are afraid.

[00:37:03] Shawn O’Malley: Monster is one of those companies for me. As the last thing today, I’ll just share a timely quote from the Oracle of Omaha, Warren Buffett. He tells us, quote, a flash crash or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment.

[00:37:21] Shawn O’Malley: Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing. A euphoric world is your enemy. My challenge to you is to have the patience to wait for those crashes and for those distortions from value to occur so that you have the opportunity and the cash on hand to buy into some of those great names.

[00:37:43] Shawn O’Malley: Maybe monster is one of them. I hope you enjoyed today’s episode and I’ll see you again next time.

[00:37:48] Outro: Thank you for listening to TIP. Make sure to follow Millennial Investing on your favorite podcast app and never miss out on our episodes to access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.