Spruce Point Capital Management Announces Investment Opinion: Releases Report and Strong Sell Research Opinion on Monster Beverage Corp. (Nasdaq: MNST)

NOTE TO EDITORS: The Following Is an Investment Opinion Issued by Spruce Point Capital Management

Believes That Monster Is Facing Pressures From New Entrants Into Its Core Energy Drink Category and Expects Competitive Intensity to Increase as 1^st Phorm and Anheuser-Busch Expand in the Market

Believes That Monster’s International Expansion Is Fraught With Challenges Such as a Complex Regulatory Environment, Less Attractive Margins, and Terms of Trade Which Appear Worse as Evidenced by Rising Days Sales Outstanding

Questions the Financial Reporting and Accounting Choices Made by Management Given a Recent Auditor Change, Abnormally Low Audit Fees, Capital Expenditures and Operating Expenses That Are Difficult to Reconcile

Believes That Monster’s Share Price Trades at an Irrational Premium to Coca-Cola, Is Fully Valued Relative to the Consensus Price Target, and Sees 25% – 40% Potential Long-Term Downside Risk

Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled, “A Monster Short”, that outlines why we believe and estimate that shares of Monster Beverage Corp. (Nasdaq: MNST) ("MNST" or the "Company") face up to 25% – 40% potential long-term downside risk, or approximately $34.30 – $42.80 per share. Download and view the report and its Full Legal Disclaimer by visiting www.SprucePointCap.com for additional information and exclusive updates.

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Spruce Point Report Overview

Monster Beverage Corp., an S&P 500 component based in Corona, CA, is a marketer and distributor of energy drinks and alcoholic and non-alcoholic beverages. In 2015, The Coca-Cola Company (“Coke”) purchased a 16.7% stake in Monster. Through this deal, Coke became Monster's preferred distribution partner globally and Monster became Coke’s exclusive energy play. As of the last 12 months ended December 31, 2024, the Company reported approximately $7,492 million and $2,188 million of revenues and EBITDA, respectively.

The concerns we outline in our report include:

• Evidence that new entrants into Monster’s core energy drink space are causing increased pressures.
  • Given the historically attractive economics in the energy drink market, and slower growth trends in other beverage segments such as alcohol, there have been more entrants into the marketplace. Notably, we believe that Celsius Holdings (Nasdaq: CELH) has captured more distribution and market share. Moreover, PepsiCo invested $550 million in Celsius in August 2022.
  • We expect other entrants to also vie for mindshare and consumer interest, especially as celebrity ambassadors promote other competitors:
    • Sports and entertainment mogul Dana White has entered into a partnership with Anheuser-Busch (“BUD”) and 1^st Phorm to launch an energy drink.
    • Megastar Dwayne “The Rock” Johnson is associated with Molson Coors, which is invested in ZOA, an energy drink brand positioned as “Better for You.”
    • NBA legend Steph Curry and soccer great Lionel Messi are also putting their names behind energy and hydration drinks.
  • Ultimately, we believe these efforts will chip away at Monster’s mindshare among consumers, and we expect competitive intensity to be fierce as Monster once had a distribution agreement with BUD, which according to our research did not end on good terms.
  • We believe Monster’s weakening competitive position can be seen by its generally diminished distribution claims, increasing promotional discounts as a percentage of gross sales, rising finished goods as a percentage of total inventory and anemic U.S. and Canada growth rate in H2 2024 despite a 5% price increase.
  • Our field research also indicates more competitive intensity within convenience stores.
    • For example, 7-Eleven, the largest convenience store chain in the U.S., is aggressively promoting their recently-launched energy drink brand and is undercutting Monster’s pricing.
    • Additionally, Wawa introduced customizable energy drinks which allow customers to formulate their own desired blend.
    • Circle K also recently launched two exclusive promotions for Celsius and GHOST Energy.
  • Perhaps in response to other distribution channel pressures, we find that multiple 2024 product introductions are being distributed through Amazon. Monster stopped providing data on its brand performance through Amazon using Stackline in its recent 2024 investor presentation. Based on our research, Monster has become more dependent on distribution through Amazon, but it carries a lower contribution margin.

• We do not believe Monster’s international growth is as attractive as its domestic growth.
  • Since 2018, approximately 50% of Monster’s $3.7 billion in total sales growth has come from international markets, with the largest growth contributor being Europe, the Middle East and Asia (EMEA). However, we do not expect international sales momentum to continue, as only two countries have been added in the past two years, competition has vastly expanded, and regulations appear likely to increase.
  • Coca-Cola Europacific Partners (Nasdaq: CCEP) is a major European customer of Monster, accounting for 67% of EMEA sales. In 2023, CCEP’s reported volume growth rateclosely matched Monster’s revenue growth from CCEP. However, in 2024, Monster reported CCEP sales growth at twice the volume growth reported by CCEP. Monster did not discuss any price increases in EMEA.
  • While Monster has said that international gross margins are lower than domestic, they do not discuss how the terms of sales might be different. We find that as international expansion increased since 2018, Monster’s days sales outstanding (DSO) increased. This could indicate that Monster has been more promotional, has offered extended payment terms, or otherwise is taking longer to collect from customers.
  • Monster’s 2023 U.K. filings no longer reference goal achievement or a successful business in its existing markets. The 2023 filing shows that gross margin contracted by 280 basis points.
  • Monster also heavily invested in a production facility for its American Fruits and Flavors (“AFF”) subsidiary in Ireland. Monster’s AFF Ireland filings indicate that it intends to supply recipes and formulae for all the non-US companies within the group. However, management does not disclose where the revenue is derived by geography because it would be “seriously prejudicial to the interest of the Company.” We believe Monster’s public comments consistently reinforce sales to the EMEA region – yet, we notice a recent surge of shipments from Ireland to Monster in California. If this is the case, why would the Company go through the expense of expanding into Europe, only to make shipments back to California?
  • Beyond Ireland, we have also identified several other issues with Monster’s international business:
    • Monster’s Australian filings appear to show increased financial strain. While Monster was publicly referencing “timing of sales into bottlers,” “shipping delays” and “severe flooding,” its financial reports suggest it either lost a major customer or they consolidated into one larger customer between 2021 and 2022. Accounts receivable has since spiked and DSO increased, which suggest that Monster’s revenue quality has deteriorated.
    • Additionally, Monster has enough exposure to China that it frequently talks about sales performance on conference calls. Despite once promising to be successful there, the Company does not say if financial losses ever turned into profits. Interestingly, Eastroc Beverage, a large competitor in the Chinese energy drink market, filed to go public and produced an industry report that did not list Monster as a top company by market share.
    • While still too early to determine the full impact, we are also watching the impact that any reciprocal tariffs from China could have on Monster given the fact that Coca-Cola has a JV in China to produce Monster’s products and Monster recently established a new Chinese subsidiary.

• Monster switched auditors in 2023, and we have identified several concerns with the financial reporting and accounting choices it has made since this change.
  • In 2023, Monster received a comment letter from the Securities and Exchange Commission asking for more quantitative disclosure around its cost reporting. In the same year, Monster also changed its auditor from Deloitte to Ernst & Young. We do not believe Monster has historically implemented the best corporate practices by separating the Chief Financial Officer, Chief Accounting Officer and Chief Operating Officer roles. Moreover, we believe Monster historically has not had a proper financial, planning and analysis function.
  • Further, we identified numerous revisions and anomalies in Monster’s financial reports that concern us. For example, Monster made subtle revisions to its property, plant and equipment (PP&E) accounts for the year 2021 without explanation.
  • Monster’s capital expenditures have vastly exceeded analyst expectations, and we calculate a large deviation between our estimated ending gross PP&E in 2023 after factoring in capital expenditures, depreciation, amortization and other items.
  • Moreover, we cannot reconcile Monster’s increase in 2023 operating expenses with its management, discussion and analysis of changes that drove the increase.
  • Monster has increased its purchase of intangible assets, which we believe may include purchase of customer relationships. We are concerned that Monster may be using this to bolster its organic revenue. In addition, we find an unusual negative capital expenditure cost in Q2 2024.
  • Monster includes its Tour Water product within its Energy segment, despite saying the product is distributed through its beer distribution network which is part of its Alcohol Brands segment. The explanation does not make sense to us, and we are concerned that Monster may be using these sales to offset challenges within the Energy segment.
  • We evaluated Monster’s audit fees to revenue ratio against a peer group of beverage and packaged food companies, and we find that Monster’s audit fees are nearly 50% below the group average. Monster’s auditor apparently failed to disclose that it used outside auditors in countries such as Singapore, Australia and India.

• We believe Monster trades at an undeserved premium to Coke, a company which we believe Monster is dependent upon for its success.
  • As one of the highest stock-based compensation issuers among large cap food and beverage peers, Monster appears dependent on keeping the perceived value of its equity high to motivate employees. Monster has done a great job of this, and as a result, its stock is among the highest valued beverage companies in the public markets. Recently, insiders have accelerated stock sales, most notably through a modified Dutch auction completed in 2024 at $53 per share.
  • Coke is not dependent on Monster as we estimate only ~0.7% and 3.0% of Coke’s revenue and market capitalization, respectively, are tied to Monster. Our research indicates that Monster’s relationship with Coke is not healthy and that speculation of a takeover premium by Coke, which now owns 21% of the Company, is not warranted. We find evidence of financial strain in the relationship starting in 2022 with commissions declining, even as sales increased, and receivables spiking in 2023. Additionally, accrued promotional allowances tied to Coke keeps increasing as a percentage of the total consolidated allowance.
  • We believe that Monster is fully valued and is a poor risk / reward given that it is trading at the average sell-side consensus target of $57 per share. Half of the analysts do not even have a “Buy” recommendation. We think that analyst projections for growth and earnings are too aggressive given the increasing competitive intensity in the industry which we outlined.
  • Valuing Monster in a range of 4x – 5x sales and 15x – 18x EBITDA, consistent with its peers and recent industry M&A transactions of faster growing companies (e.g., Celsius acquiring Alani Nu and Keurig Dr. Pepper acquiring GHOST Energy), implies a potential 25% - 40% long-term downside risk. We expect Monster’s share price to underperform the food and beverage industry along with the broader equity market.

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Please note that the items summarized in this press release are expanded upon and supported with data, public filings and records, and images in Spruce Point’s full report. As a reminder, our full report, along with its investment disclaimers, can be downloaded and viewed at www.SprucePointCap.com.

As disclosed, Spruce Point and/or its clients have a short position in Monster Beverage Corp. (Nasdaq: MNST) and owns derivative securities that stand to net benefit if its share price falls. Following publication of the report, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial opinion. For additional important information, please review the “Full Legal Disclaimer” contained in the report.

About Spruce Point

Spruce Point Capital Management, LLC is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.

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