It's Time for Me to Buy More SodaStream

Editor's note (Nov. 1, 2013): Since publication of this buy recommendation and portfolio purchase in mid-October, SodaStream’s third-quarter tidings resulted in an approximate 15% decrease in stock price. The author retains a positive long-term prognosis for the company and the stock.

Eco-friendly, Israel-based SodaStream (NASDAQ: SODA  ) has been on a tear this year. However, the stock price has lost some fizz in recent months due to fears of impending, big-name competition.

SodaStream is one of the stocks I purchased for the real-money Prosocial Portfolio I manage for Fool.com. Here is the original buy article from June 2012.

I'm building this public-facing portfolio to focus on responsible companies and see how the portfolio's performance stacks up over time. These companies already possess or are adding factors like excellent management, solid corporate governance, environmentally sound policies, or social consciousness into their businesses. In a perfect world, they'd possess all of the above.

Many investors have been fretting about the prospect that SodaStream's heated growth could cool down fast. The truth is, those who have had this stock on their watchlists are being handed an excellent opportunity to add some eco-friendly fizz to their portfolios -- as well as a dash of disruptive innovation.

Rewards... and risks
SodaStream shares topped out at about $75 per share over the summer. Regardless of recent relative weakness, it's still one of the best performers in the Prosocial Portfolio (and for those investors who bought shares early). However, even amid recent worries, buying this stock right now is a much better idea than selling.

Right now, if growth continues as expected, SodaStream sports a PEG ratio of 0.87, indicating an undervalued company. Since the fiscal year ended January 2011, SodaStream has been generating torrid revenue growth; that year, it reported 48% top-line growth. In the last 12 months, revenue has increased 43% to $496 million. Over a three-year period, SodaStream has generated compound annual growth of 46.6% and 67.1% in revenue and net income, respectively.

Of course, there are risks; investors often don't enter pessimistic territory for outlandish reasons. (Sometimes their reasons are pretty nutty, of course. Short-term investors, traders, and algo-bots aren't known for calm, deep thinking.)

Some of the big players are apparently eyeing SodaStream's market, planning similar make-your-own-soda products. That does present a more difficult playing field than being the first mover in the market, with a major head start in the area of a new solution for Americans' big-time thirst. However, it's not the end of the world, either.

The fizzkill
The idea that Starbucks (NASDAQ: SBUX  ) could be planning its own soda-spouting machines has caused SodaStream's most recent fizzkill. So far, we have intelligence from the U.S. Patent and Trademark Office indicating that this similar product would be named Fizzio. (Personally, I find that a rather unfortunate name.)

My colleague Rick Munarriz pointed out an important point, though: At least in its first iteration, Fizzio is intended for institutional markets like restaurants.

Green Mountain Coffee Roasters (NASDAQ: GMCR  ) got an early advantage in the single-serve coffee market with its Keurig machine. It has trademarked a product called Karbon, apparently a cold-beverage solution that in most cases echoes SodaStream's at-home bottled bubbles.

In both cases, these are trademark applications, referring to terms for such products -- not products that will hit the market tomorrow.

SodaStream is already way ahead of the game because, well, it's out there and has moved a lot on word-of-mouth buzz -- it's on shelves at huge retailers like Wal-Mart -- and it already has some powerful partners for promising make-your-own-soda syrup flavors.

The "Bring it" principle in competition
There are plenty of reasons investors should buy instead of freak out. At-home sparkling beverage machines have by no means saturated the market, and there are plentiful reasons that SodaStream and other such machines make sense for kitchen countertops.

Bloomberg contacted the company last week about the concept of impending competition, and Chief Corporate Development and Communications Officer Yonah Lloyd responded, "Home soda making is still a new category in the U.S. with over 98 percent of homes as potential customers. Any legitimate company that enters will help raise awareness, and this is good for SodaStream and all competitors."

Basically, it sounds like SodaStream's management's message is "Bring it." This isn't unusual, since it has been bold in the past. Recall its aggressive ad campaigns aimed directly at soda giants Coke and Pepsi and the massive amount of waste resulting from beverage products, whether we're talking about plastic bottles, transportation costs, or simply a waste of consumers' time and energy lugging heavy sodas to their homes.

Also, it reminds us of an aspect increasing numbers of good corporate managements understand: Sometimes competition is less terrifying than many investors think.

Whole Foods Market, a repeat Prosocial Portfolio stock, is well known for the "Bring it" mentality regarding rivalry. Whole Foods Co-CEO Walter Robb literally said, "Bring it on" recently in regard to jabs about rivalry from companies like Sprouts, which recently went public with great fanfare.

Copycatting behavior can reflect and validate a powerful consumer shift and the proof of the vision of the original innovative or even disruptive product. As long as the upstarts and forward-looking companies continuously move forward and stay one step ahead of rivals, a certain number of rivals breathing down their necks make them move faster and stronger.

The exciting world of growth stocks
SodaStream has skyrocketed in a short time, and often growth stocks can get nailed on the slightest whiff of pessimism. It can be hard to hold on, much less buy. Many of us who have been investing for a long while have seen such plunges on small or temporary issues before, and we'll see it again. For growth stocks like SodaStream, major roller coasters can be even more nauseating than SodaStream's recent dip.

Regardless, a recent attack of market nerves has served up a better purchase price. For those who are calmly holding and feeling comfortable with SodaStream's long-term prospects, or have been thirsting to buy the stock, now is a great time. That's why it's becoming a second-time buy for the Prosocial Portfolio.

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Read/Post Comments (10) | Recommend This Article (13)

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 November 03, 2013, at 6:42 AM, KBecks wrote:

    Soda Stream advertises on the Rush Limbaugh radio program. Gotta love that.

  • Report this Comment On November 03, 2013, at 11:53 AM, Plan2Prosper wrote:

    I have difficulty supporting a stock unless I believe the company's core/only product has long-term opportunity. With all respect to the company's fans, I don't see that here. Could you (or other purchasers) please help me understand the appeal of their product - it doesn't seem cost effective compared to buying soda.

    It looks like flavor packs cost $5 to make 33 x 12oz can-equivalents ($0.15/can). Refill carbonators are $15 per 60 L (33.8oz/L) = $0.09 per can, totaling 24 cents - more if you have bad tap water and would use bottled or filtered water.

    In contrast, I have a solid supply of brand-name soda and by watching for sales I've never paid more than 25c/can - quite often less. Sodastream seems at best break-even and would be a more effort-intensive alternative. Moreover, canned soda rarely goes bad. I imagine sodastream requires you to prepare in advance and has a moderate shelf-life before defizzing.

    This hasn't even considered the ~$60 cost of a new machine, although one might argue the starter packs cancel the cost.

    Using the product seems to require a large start-up cost (relative to a case of soda), needs more time/prep/cleaning, and locks buyers into a system of products whose taste might not be their favorite, all while providing virtually no long-term savings. Will the company still have purchasers in 5 years? In 10?

    I hold no position, long or short, and just want to understand more. I wish you all well with your positions.

  • Report this Comment On November 04, 2013, at 9:24 AM, KBecks wrote:

    Plan2Prosper, I agree with you. The product is a kitchen gadget. As a consumer, I don't get it.

  • Report this Comment On November 04, 2013, at 10:32 AM, stan8331 wrote:

    As far as I can tell, the make your own soda market is predominantly about consuming a healthier product, versus saving money. Commercial sodas are very cheap, but they contain potentially harmful ingredients a growing number of people wish to avoid: high fructose corn syrup, aspartame, caramel coloring, sodium benzoate and brominated vegetable oil, just to name a few. SodaStream is a first mover tapping into a growing market with enormous potential for the future.

    Even so, I do have questions about SodaStream. My biggest concern relates to the CO2 used for carbonation. Bulk CO2 is extremely cheap, yet SodaStream's proprietary CO2 cylinders are costly to refill and make up a significant portion of company revenue. That's great for the company's current profitability, but it seems to make them vulnerable to a competitor who drastically undercuts them on CO2 pricing to grab market share.

    The other serious risk I see is competition from healthier pre-packaged sodas that don't include the sort of questionable ingredients listed above. Making your own soda is never going to be as easy as popping open one made in a factory. Personally, I have been drinking Zevia soda for some time now. I haven't yet been convinced to buy into SodaStream - the stock or the product, but I am keeping an open mind.

  • Report this Comment On November 04, 2013, at 11:59 AM, ElCid16 wrote:

    These comments remind me of the comments I heard regarding Green Mountain and Keurig 5 years ago.

    Green Mountain is a $10B company, now. Their Operating Cash Flow might hit $1B this year.

    Arguing the viability of a product while watching the product grow 30% per year....things that make you go hmm.

    Nothing to see, here. Move along.

    http://www.google.com/trends/explore#q=sodastream&cmpt=q

  • Report this Comment On November 04, 2013, at 8:07 PM, Plan2Prosper wrote:

    Thank you stan8331 - I wouldn't pay more for healthier soda, but I can understand that many would.

    Likewise, ElCid16, I'll agree both Green Mountain and Keurig have grown well, although I don't use either - still on cheap drip coffee. One might argue that they grew as cheaper/more convenient alternatives to higher-priced 'quality' alternatives like Starbucks, but you're right - I probably would have made similar arguments during their start-up.

    I do have a habit of walking away from a lot of multi-baggers - and that could be the case here - but I prefer to pass unless I'm much more confident in the product, financials, and price margin of safety.

    Thanks for the ideas and insights!

  • Report this Comment On November 05, 2013, at 4:05 PM, cajunfriar wrote:

    When I think soda dispensing, I don't think eco-friendly or responsible.

  • Report this Comment On November 11, 2013, at 3:39 PM, InvestForGood wrote:

    I am concerned about owning a company which may be directly or indirectly contributing to the displacement of people. Jim Mueller did a report in 2012 to which one Fool responded: SodaStream is an Israeli settlement product manufactured in the Palestinian West Bank on stolen land and using stolen resources. It is the target of a global boycott and divestment movement because of its furthering of the illegal Israeli occupation of Palestine. Divest from SodaStream. http://www.globalexchange.org/economicactivism/sodastream

    I think I'll stay away...

  • Report this Comment On November 12, 2013, at 3:26 PM, rabdelazim wrote:

    I agree 100% InvestForGood.

  • Report this Comment On November 12, 2013, at 3:27 PM, rabdelazim wrote:

    Though..your link appears dead.

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