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With Valuations Stretched, Monster Beverage Is Running Out Of Fizz

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Shares of Monster Beverage (MNST) have delivered a stunning performance over the past twelve months.

Shares took a big leap in the second half of 2020 having quickly recovered to pre-pandemic levels following the COVID-19 crash. But since the beginning of 2021, MNST stock has traded relatively sideways between $85 and $95 per share.

This makes sense given its current stretched valuation following last year’s massive move upward, however, the underlying fundamentals for the company remain strong.

So, what’s next for Monster Beverage? While markets remain robust, the stock could hold onto most of its prior year gains and continue to trade around current levels, but if markets take a tumble in the near-term, richly priced names like MNST could potentially see the heaviest declines.

Monster Beverage’s Valuation Concerns

There is some rationale behind Monster Beverage’s rich valuation with its strong balance sheet, consistent cash flows, and runway for 10-15% revenue and earnings growth in the coming years.

The launch of a new premium energy drink brand has also boosted its prospects and some analysts believe that the company’s growth could top expectations.

But these positives may not be enough to sustain it at recent prices. Monster Beverage currently sports a forward price-to-earnings (PE) ratio of around 33x.

In comparison, its similarly sized peer, Keurig Dr Pepper (KDP) has a much more modest forward PE of 21.5x, and National Beverage (FIZZ), a smaller competitor and the maker of La Croix, has a forward multiple of around 24.9x.

This does not mean that MNST stock will eventually revert to the mean and fall to a valuation on par with peers, but if markets correct in the coming months, this “priced for perfection” name could see some valuation contraction.

Vulnerable If Markets Pull Back

It’s hard to tell whether the markets are gearing up for another pullback, or if the bears are underestimating the strength of the overall economic recovery. With interest rates expected to rise, and other factors pointing to a market-wide correction, buying high-flying names while they trade near all-time highs could result in some heavy near-term losses.

If markets-at-large correct, it won’t necessarily matter what stocks investors own as we would probably see a dip across most equities. But stocks like MNST which are trading at stretched-out multiples could see more out-sized moves lower.

While this is not set in stone, bearing this concern in mind might be prudent and waiting for a more reasonable valuation to enter a position may be the best move.

What Analysts Are Saying About MNST Stock

According to TipRanks, MNST comes in as a Strong Buy based on 14 analyst ratings. Of these, 11 rate it a Buy, 3 recommend a Hold while none suggest a Sell.

As for price targets, the average analyst price target on Monster Beverage stock is $103.83 per share, which implies around 14% upside potential from current prices. Analyst price targets range from a low of $94 per share to a high of $118 per share. (See Monster Beverage stock analysis on TipRanks)

Bottom Line: Wait For More Reasonable Prices

The fundamentals for Monster Beverage stock remain rock-solid. The company is still set to deliver double-digit earnings growth in 2021 (around 13.5%) and 2022 (around 13%). There is also the possibility that actual results will exceed these already great projections.

While there is some justification for a premium valuation, perhaps not to the levels currently seen with the stock. If markets experience another sell-off, it’s stocks like this one that could produce outsized losses.

So, what’s the best move right now? Waiting for more reasonable prices before buying MNST stock might be the sensible thing for investors to consider.

Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.