Sodastream International Pops on Earnings as Water Takes Center Stage

In this segment from Market Foolery, the cast turns their attention to SodaStream (SODA) and its evolving business model. After encountering significant difficulties in the U.S. market, the company has staged a successful comeback with particular strength in Europe. The stock has been volatile for a few years now, but there appears to be a lasting turnaround under way.

A full transcript follows the video.

This podcast was recorded on Feb. 15, 2017.

Mac Greer: Guys, let's conclude here with SodaStream. This is a stock that has been incredibly volatile over the last couple years. And we have some good news, and the stock up big on Wednesday after reporting better-than-expected earnings. Jason, forget soda, it seems like the story here is sparkling water.

Jason Moser: Well, I liked our conversation earlier this morning: maybe this company, really, it all just boils down to the wrong name, right?

Greer: Terrible name.

Moser: We're sitting here ragging on soda, it seems like, quarter in and quarter out. Maybe it needs to be something like SeltzerStream or whatever. But, I think the real beauty to this business, in the beginning, it's one that we've covered here in the Foolish universe for a while ...

Greer: And what do they do, for people who don't know the company?

Moser: SodaStream basically sells you these machines so that you can make seltzer or soda at home. You can carbonate your own water and make your own sodas at home. And on the surface, it sounds like a pretty neat idea, you don't have to go lugging around 12 packs of Diet Coke anymore, you can just do it all right there at home.

Greer: I hate that idea. I'm sorry, I don't find that appealing at all on the surface.

Moser: [laughs] What, having the machine there?

Greer: Yeah! I don't drink soda, but I wouldn't want to make my own soda if I drank soda. That's like making your own toothpaste. Why? Why?

Moser: I don't disagree.

Greer: So, no, not on the surface, take it back. [laughs] 

Moser: Being a Diet Coke guy, SodaStream, as a product, never attracted me from the beginning. Now, I will also say I made a big shift in trying to drink more seltzer. But even as that has occurred, I still have zero interest in having one of these SodaStreams on my counter at home because of the fact that you have to keep on replacing that CO2 cartridge. It's just constant maintenance. And that's the crux of the question here. The beauty of the model has always been the razorblade nature -- the razor being the machine and the blades being the consumables that you use for the machine, the CO2 cartridges, the flavors that you use for whatever you're wanting to drink. And for a long time, it seemed like maybe this had promise. Certainly has gained a lot of traction overseas. U.S., I think, the U.S. market was viewed as a potential opportunity and that never really played out so much, and the stock got pummeled over the past few years because of that.

Interesting to see, they're making a little bit of a comeback here. If you look at the numbers, there was about 22.4% unit growth for the quarter, which translated into 37% growth in revenue for those machines. So, they're actually selling machines, and they're getting some decent pricing on them. The growth in the consumables, which is the higher-margin, was less impressive, up 5%. This kind of gets back to the initial question that we always had with these things -- it's one thing to give this thing as a gift to someone, where it's like, "Oh, that's a neat machine," or whatever. But ultimately, at some point, does it not just end up collecting dust on your kitchen counter? And I think that's the hurdle that they still have to clear. This was a decent quarter, I'm not sure it necessarily indicates that they have cleared this hurdle and everything is better again.

Greer: David, looking at the stock chart for the last few years, it's gone from $40 up to around $70 all the way down to $13, and now it's back around $50.

David Kretzmann: Yeah, across $50s. I think SodaStream, it's a great time to take a step back and see a lesson there, that you don't want to cut the future winner too early. SodaStream, I think the verdict is still out whether or not it is a winner, but I would much rather hold a loser too long than sell a winner too early. In Rule Breakers, we sold SodaStream right around $13 a year or two ago. Since then, the stock has come roaring back almost four times over the past year. So, I think there is something to be said for the strategy of just buying and forgetting. Even if you have a loser, if it's a small percentage of your portfolio, there is something to be said for just letting that ride.

With SodaStream, it's interesting to see what has enabled this company to come back. I think part of that is the repositioning of the product, focusing less on a soda alternative and more a soda replacement, or that sparkling water aspect of the product. But the company always had a pretty stable business in Europe. Europe, right now, the Western Europe business is still double the business that SodaStream generates in the Americas. Right now, in America, the household penetration -- so, the number of households with a SodaStream in it -- is about 1.5%. In Europe, that number is over 10%. So, there is still a runway, if SodaStream can somehow crack that code here in the U.S. There is still a runway for growth there. But in the meantime, that European business is still growing. I think there's still a lot to like here. The margins are really increasing. But I agree with J-Mo that you really want to see those consumables, those repeat purchases, increase because I think that's really what matters most for long-term shareholders.

Greer: OK, you mentioned the reposition. I want to come up with a better name. Let's go around the horn. Right now, SodaStream, I think soda, for too many people, has a negative connotation now. So, what are you changing the name to?

Kretzmann: FizzBot.

Moser: FizzBot, I like that.

Kretzmann: 21st century.

Greer: I like it. Jason?

Moser: I'll go with SeltzerStream, honestly. I feel like soda conveys this unhealthy vibe that we're seeing in the soda market. Soda is either a bad drink, or it's what George Costanza wants to name his baby on Seinfeld. So, skate where the puck is going, as they say. SeltzerStream.

Greer: I've got two, ready? WellStream, like, I'm feeling well.

Moser: It sounds like you just got bought by Wells Fargo. That's not in a good way.

Kretzmann: You have a backup.

Greer: Here's the winner: FunStream.

Kretzmann: It's like a party or something.

Moser: That's like a super squirter that your kids shoot each other with in the backyard.

Greer: Who doesn't like fun?

Kretzmann: I feel like you would see that at Chuck E. Cheese or something.

Greer: Hey, it's brainstorming. There are no wrong ideas at this point.