SodaStream (NASDAQ:SODA), the home-soda-machine maker, hasn't done well in the stock market in the past several months: Shares of the company have lost more than 30% of their value since mid-June. Due to the sharp drop in the stock price, is the company undervalued? Is it time to get back into SodaStream? 

Revenue continues to rise
During the third quarter, SodaStream was able to expand its net revenue by more than 28%, and in the past three quarters by more than 30%. Based on the company's guidelines and performance in the past three quarters, SodaStream estimates its fourth-quarter revenue will reach $172 million -- an increase of nearly 30% year over year.

The company's management seeks to surpass $1 billion in revenue by 2016 -- nearly 80% higher than the current estimates for 2013. This means the company's revenue will have to grow by an average of at least 20% each year to reach this goal. One way to reach this goal is via collaborations with other companies. 

SodaStream continues to find new ways to expand its revenue by collaborating with other companies: The company has entered a joint project with Samsung to integrate its system with Samsung's refrigerators. SodaStream's launch at Wal-Mart fueled the sharp rise in sales during the second quarter. 

Its recent product release of SodaCaps could improve its soda-making experience, which may translate to higher revenue. 

These kinds of collaborations are likely to keep the company augmenting its revenue in the coming quarters. The company is also likely to maintain its high revenue growth as long as the big beverage companies don't directly engage with SodaStream. 

Flying under the radar
One of the advantages of being small is flying under the radar of big beverage companies including Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP). Up to now, these companies haven't done much to compete head-on with SodaStream in the home-soda-making business. For now SodaStream isn't putting much of a dent in Coca-Cola and PepsiCo's revenues.

In the third quarter, Coca-Cola's revenue slipped by 2.5%; PepsiCo's net revenue rose slightly by 1.5%. These companies aren't likely to increase their sales by a high rate due to their large size and market share. Their moderate changes in revenue are mostly driven by seasonal changes, local competition, and economic developments. In North America, SodaStream's net revenue was only $50 million during the third quarter. In comparison, Coca-Cola's revenue was $5.7 billion in North America -- this means SodaStream's revenue was less than 1% of Coca-Cola's revenue in North America.

Despite the low growth in revenues, these companies still have several advantages over SodaStream including diversity in their product lines, which, in the case of PepsiCo, extends to snacks and other food products. These companies also maintain much higher profit margins than SodaStream's.  

During the third quarter, SodaStream's profitability reached 12.5% -- a slight decline from last year; in the 2012 third quarter, the profit margin was 14.6%. In comparison, Coca-Cola's profitability reached more than 20% in the third quarter; PepsiCo's, 16.4%. These higher profit margins enable these companies to provide a reasonable dividend; both Coca-Cola's and PepsiCo's annual dividend yield is around 2.8%.

On the other hand, SodaStream doesn't pay a dividend. Therefore, investors are likely to benefit from holding on to its stock as long as it continues to sharply improve its revenue by such a high rate. In terms of valuation, is the company worth buying?  

Following the drop in SodaStream's stock in recent months, the company's valuation remains higher than that of its leading competitors, as indicated in the table below. 

Soda Valuation

Source of data: Yahoo! Finance and Damodaran's site

The table compares the enterprise value-to-earnings before interest and taxes ratios of SodaStream, Coca-Cola, and PepsiCo to the beverage industry. As you can see, Coca-Cola and PepsiCo are, as expected, in line with the industry average, while SodaStream's valuation remains higher by more than 30% of the industry's average. A higher ratio is expected for SodaStream considering its high growth in sales. But this also means the company's current price isn't much of a bargain. 

The Foolish bottom line
SodaStream is a great company that continues to find ways to maintain its high growth rate. As long as the company doesn't have to directly compete with other beverage companies, it could maintain its growth. On the other hand, if the company continues to grow at its current pace, this could result in Coca-Cola or PepsiCo or both engaging in direct competition -- releasing their own soda maker.

Moreover, SodaStream's relatively low profit margin, high valuation, and lack of diversity (beyond beverages) doesn't work in its favor as an investment. Therefore, at this point, I think the company doesn't offer enough to make it an stock worth purchasing. 


Fool contributor Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of Coca-Cola, PepsiCo, and SodaStream. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.