When buying high-growth companies, asset-light models are the way to go. Businesses that do not require significant additional assets to grow sales are always better businesses than those that require heavy capital expenditures, all else equal.
Monster Beverage Corp (NASDAQ:MNST) is a terrific example of a high-growth, asset-light business. Monster’s product is its brand. It spends a lot on marketing and promotion of its brand, but does not require a proportional growth in assets to meet increased sales demand. This enables it to earn an enormous return on assets.
If there were one part of Monster’s business that could be capital intensive, it would be distribution. Proper distribution of the product requires a capital-intensive build-out of a vast distribution network.
But instead of building out the network itself, Monster outsources the distribution to companies like Coca-Cola Enterprises Inc (NYSE:KO). This enables the company to save on capital expenditures, which it can then spend on advertising.
Monster Beverage Corp (NASDAQ:MNST) has a bright future ahead of it. It sells more energy drinks in domestic convenience stores than any other company, including Red Bull. In addition, it is second in global market share, with a 37% share of the global market compared to Red Bull’s 42% share.
Although the U.S. market is becoming saturated, Monster has a long runway for growth overseas. If the company can replicate its success in the U.S. overseas, then revenues could easily double by 2016.
With a bright future that includes continued market leadership in the U.S. and strong international growth prospects, Monster is set to become a global powerhouse in energy drinks.
Competition From Big Money
The road to global dominance will not be easy. In addition to Red Bull, Monster Beverage Corp (NASDAQ:MNST) faces competition from the likes of PepsiCo, Inc. (NYSE:PEP) and Coca-Cola Enterprises Inc (NYSE:CCE).
PepsiCo owns the AMP energy drink brand and is launching Kickstart, a new morning energy drink. The company has deep pockets and a steady stream of cash flows thanks to its Frito-Lay division, the world’s largest snack food company by revenues and a resilient business even during deep recessions.