Monster Beverage: U.S. Share Need Not Increase

Summary

• Monster’s asset-light business model allows it to grow quickly.
• The opportunity for international growth is still massive.
• The U.S. energy beverage market should continue growing nicely such that Monster will do fine without the need to increase share.

Jack Taylor/Getty Images News

Introduction

My thesis is that Monster Beverage (NASDAQ:MNST) can have good returns even if their U.S. market share is flat or slightly lower in the coming years. There are plenty of opportunities internationally and the overall U.S. energy beverage category should continue to do well such that the pie is growing fast enough to more than offset a thinner slice. If Red Bull and Monster can be rational competitors like cereal companies, then everyone should be happy.

Being an asset-light company, Monster has been able to grow quickly and this should continue. The Red Bull company profile says they have 12,618 employees and their 2020 revenue was about $7.3 billion. Outsourcing the manufacturing process to third party bottlers and contract packers, Monster's 2020 10-K says they only have 3,013 full-time employees and an overall employee count of 3,666 to go along with their 2020 revenue of $4.6 billion.

Among companies in the 100 Baggers book with spans of 14 years or more, Monster Beverage has the highest total return CAGR for shareholders of over 45% for 21 years. A $10 thousand investment in Monster [then Hansen] from December 1993 turned into over $25 million by 2014! Monster has been somewhat in line with the S&P 500 since 2014.

Co-CEOs Rodney Sacks and Hilton Schlosberg could have retired comfortably many years ago but they have an indefatigable interest in the energy drink business.

International

I believe there is vast growth potential internationally! When Monster did the Coca-Cola (KO) deal in 2015, the Coke energy drink sales were 40% U.S. and 60% international. Just past the 26 minute mark of the 2017 video interview with Co-CEO Rodney Sacks, they say the U.S. only accounts for about one-third of the global energy drink market in volume and revenue. Monster's 2020 10-K shows that sales in the U.S. and Canada were $3.2 billion which is about 70% of their $4.6 billion revenue total.

Over time, international sales should rise well above today's level of 30%. The Red Bull company profile says they had sales of 6.3 billion euros in 2020. Using a conversion rate of 1.16, this is about $7.3 billion which is about $2.7 billion more than Monster's total of $4.6 billion for 2020. Monster shows that they and Red Bull are close to each other with respect to U.S. dollar share so this difference is on the international side.

The growth in Asia Pacific is exciting, going from a little over $250 million in 2018 all the way up to almost $425 million in 2020:

Image Source: 2020 10-K

The 2Q21 10-Q shows that EMEA sales increased 64% from $328 million in 1H20 to $537 million in 1H21 and Latin America & Caribbean sales increased 74% from $91 million to $158 million over the same period:

Image Source: 2Q21 10-Q

U.S. Market

Monster's U.S. and Canada sales increased about 7% from $3 billion in 2019 to $3.2 billion in 2020 despite the fact that their U.S. dollar market share declined from 40.2% to 38.8%. Looking at the yearly slides for total U.S. dollar share in the January 2019, 2020 and 2021 business updates, we have the following:

Image Source: Chart from author's spreadsheet based on annual business updates.

Note that the Monster share includes all their brands like NOS, Full Throttle and Reign. Reign is also shown separately because of their importance in terms of competing with VPX Bang in the performance subcategory.

It's hard to get new energy drink brands to scale. A May 2020 WSJ article says Coke is discontinuing their U.S. energy-drink experiment as sales were disappointing. Growing nicely from 2018 to 2019, VPX Bang looked like a serious threat in the performance subcategory but Monster's Reign brand answered in April 2019. Regarding the VPX Bang lawsuit, Co-CEO Rodney Sacks said the following in the 2Q21 call:

In March 2019, VPX, the maker of Bang Energy drinks, sued Monster, alleging that its Reign products infringed VPX's Bang trademarks and trade risk. A trial was held last year. And on August 3, 2021, the court issued an order denying all of VPX's claims and holding that VPX is entitled to no relief whatsoever. In fact, the court specifically found that VPX copied its bank trade risk from the original Monster Energy cans. The court's decision confirms that Monster and Poland retail partners are free to continue to sell our Reign products without any changes and without any restrictions. Monster always believed and maintained that VPX's claims were frivolous, and we are extremely pleased that the court rejected all of VPX's claims while vindicating Monster's rights.

I don't believe energy drinks are as pernicious as some of the U.S. headlines imply. There will always be a market for those who need a quick jolt of caffeine. Hot coffee can't be consumed quickly and not everyone likes the taste. It's not in management's best interest to create an environment where a bellicose Red Bull emerges so I believe the 2 companies will be careful not to get carried away when competing for U.S. market share.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MNST, VOO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Any material in this article should not be relied on as a formal investment recommendation. Never buy a stock without doing your own thorough research.