SodaStream Is About to Overflow

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Since its IPO in late 2010, SodaStream International (Nasdaq: SODA  ) has met its share of skeptics. Despite a blowout earnings report a month ago that sent shares up more than 25% a single day, the stock has given back many of those gains and now trades around $33. The shorts have piled on, and even after its tumble from as high as $48.13 earlier this year, 73% of shares are still sold short. How much lower do they think this stock can go?

Say, what's the big idea?
SodaStream shareholders have surely done plenty of head-scratching over the stock's numerous false starts. The maker of at-home soda machines and syrup and CO2 consumables has beaten earnings solidly in each of its past four quarters. In fact, profits have come 33% ahead of analyst expectations on average. That's no small feat. Even Apple, widely known for thrashing the Street's expectations nearly every quarter, has beaten estimates by an average of 22% over the last four quarters, still impressive but not as good as SodaStream.

So it's clear that SodaStream's bugaboo is not its financial performance, as the company continues to put up strong growth by expanding into new markets in the Americas and Asia. Two main factors seem to have turned the bubbly stock flat.

Fool me once ...
Investors seemed to once recognize the potential of this rule-breaking company, as its value more than tripled in its first nine months of trading. The stock fell off a cliff, however, last August, after management bungled earnings guidance in an otherwise impressive quarterly report. Despite beating EPS estimates by $0.11 cents per share, with bottom-line growth at 41% and revenues jumping 38%, management maintained guidance for the year -- a sign that spooked investors and caused the stock to plummet 41% in intraday trading. Growth stocks generally get one chance to prove they're for real. Once they fall off track, it's hard for them to regain the market's confidence.

Still, the market's reaction was bizarre. As fellow Fool Chris Baines argues, if earnings had simply met expectations, the market wouldn't have batted an eye at management's decision to maintain guidance. Notably, the company beat earnings estimates by 64% in its next quarter, confirming suspicions that the guidance was conservative. How did the market receive that blowout quarter? Investors shrugged it off with a mild golf clap, sending shares up a mere 5%.

It's a fad?
Perhaps the crux of the SodaStream bear argument is that the product is simply a fad. While it may seem fun and exciting to make your own soda, the bears say, eventually laziness will take over and these consumers will return to buying bottles and cans from traditional providers at the supermarket. They see it as another do-it-yourself kitchen contraption that will join the pasta maker and popcorn machine in the corner of the attic collecting dust.

But if DIY soda's a fad, someone forgot to tell SodaStream's customers. The company has been in business in one way or another since 1903. Revenues have grown consistently for several years and more than doubled between 2009 and 2011. Of course, not every buyer of the base soda machine will become a convert, especially those who receive the soda maker as a gift, but the company bakes a certain attrition rate into its projections.

In spite of those consumers who do condemn their soda maker to the back of the cupboard, consumables are still growing at a strong pace. Based on unit sales in the last quarter, flavor syrups grew by 52%, while CO2 refills were up 29%, both ahead of growth in starter kits, which clocked in at 15%. For the three-month period, consumables revenue jumped 61%, and the higher-margin category now makes up 60% of sales, helping to boost overall margins.

The critics seem to be confusing a fad with a niche product here. SodaStream's growth isn't driven from any sudden promotion or fashionable trend. Users like the product, the ability to customize their own sodas, its flexibility for bartending, or just their ability to make seltzer. Regular buyers who have been purchasing consumables for years now aren't going away; they are multiplying. And the skeptics seem to overlook the fact that the beverage market SodaStream competes in is enormous. If the company achieved just 1% of Coca-Cola's (NYSE: KO  ) market value, shares would gain 150%.

The company does face headwinds thanks to Green Mountain's (Nasdaq: GMCR  ) immolation over the past year, but that was largely because of a looming patent cliff and accounting shenanigans that hobbled the Keurig maker, neither of which applied to SodaStream. Investors simply seem to be wary of another beverage company with a razor/blade model.

No backwash
Analyst estimates for SodaStream shot up after its latest report, and Wall Street is now eyeing earnings per share of $2.17 for 2012 and $2.71 for 2013. That puts the soda-maker's forward P/E (for 2013) under 12, bordering on value territory, and significantly lower than beverage heavyweights like Coca-Cola (16.5), PepsiCo (NYSE: PEP  ) (15.2), and Dr Pepper Snapple (NYSE: DPS  ) (12.8). And you can bet SodaStream offers more growth than the big boys. Wall Street believes the DIY brand will grow its top line by 18.2%. Second place in that category? That would be Coke, with just 5.1% growth in 2013. And don't forget that the experts have consistently underestimated SodaStream in the past, so shares could be even cheaper than they look.

Throw in SodaStream's recent entry into 2,900 Wal-Mart stores, just-granted approval to sell in Brazil, and its deal with Kraft earlier this year to push Country Time Lemonade and Crystal Light, which could foreshadow similar co-branding deals, and it's even harder to understand how this stock is nearly as cheap as it's ever been. I already bought shares last year, but at these prices it's tempting to add more. This stock won't stay this low for long.

Free refills
Based out of Israel, SodaStream has spread around the world, growing quickly in Asia and the Americas, but it's not the only company taking advantage of new markets. Thanks to the emerging middle class in countries such as India and China, a golden opportunity is awaiting a slew of familiar consumer brands that could be on the verge of reaching a billion new customers. Get a piece of this growth story by checking out our special free report: "3 American Companies Set to Dominate the World." It names a group of American brands with solid footholds in these markets that can give you access to growth in places like China without the risk of investing in a foreign company. You can get your copy now

Fool contributor Jeremy Bowman owns shares of SodaStream International and Apple. The Motley Fool owns shares of Apple, Coca-Cola, PepsiCo, and SodaStream International. Motley Fool newsletter services have recommended buying shares of SodaStream International, Apple, Green Mountain Coffee Roasters, Coca-Cola, and PepsiCo, creating a diagonal call position in Wal-Mart Stores, creating a lurking gator position in Green Mountain Coffee Roasters, creating a bull call spread position in Apple, and creating a diagonal call position in PepsiCo. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 05, 2012, at 6:29 PM, mikecart1 wrote:

    IMO, if the product was as good as they say, and people are willing to buy as much as they wish, and if it tastes just as good as the regular thing, then Pepsi and Coca-Cola would have had their version of it long ago. IMO, most people that drink soda don't have the time or will spare the time to turn the entire process of drinking soda into a process that is even more difficult than making coffee. Yes, many still have no clue of how to actually make coffee from beans. That is why places like Starbucks are making a killing. People would rather pay $4/cup of coffee because they have no clue of how the coffee beans turns into coffee to drink.

    Sad but true.


  • Report this Comment On June 05, 2012, at 7:15 PM, TheDumbMoney2 wrote:

    The switch to reporting in dollars should help, too, nonsensical as this may be. Comparing share moves to the Eurozone crisis, it is clear this has been trading as a "Euro stock." That is part of the reason for the misvaluation.


  • Report this Comment On June 06, 2012, at 8:17 AM, GMGAsset wrote:

    Mike, Sodastream has had patent protection of their own which is just expiring around now if I remember correctly [did the research a year ago]. Also it contrarily takes much less time to make your own soda [a minute or less per litre in our home] that going to the store, lugging home 20 lbs of canned or bottled soda which is 95% water anyway, chilling it and then consuming:

  • Report this Comment On June 06, 2012, at 12:33 PM, itsjustacover wrote:

    mikecart1: "a process that is even more difficult than making coffee"?

    Do you own one? It takes 30 seconds to make customized sodas. Difficult? Yes, if you don't know how to screw in a light bulb.

    What's difficult (or at least is a lot of work) is, going to the store, loading the pop case on your cart, carting it around the store, loading it onto the checkout, then back into the cart, then into the trunk, then into the house, not to mention having to handle all the recycling.

    I wonder how many of those who call this a fad acutally use it?

  • Report this Comment On June 06, 2012, at 11:49 PM, flyin47 wrote:

    We've used Sodastream for over 8 months and think it is great. It's easy to use, has many excellent flavors and sure beats hauling cases of soda home from the store. No recycling problems either. We love it!

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