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Shares of SodaStream (NASDAQ: SODA ) lost about a quarter of their value when the company announced that its annual profit for 2013 would be considerably lower than what analysts were expecting. SodaStream has now fallen by about 50% from its 52-week high, as investors are beginning to question the company's growth story, which relies on convincing people to make soda at home using its machines and syrups.
A look at the results
SodaStream projects its revenue for 2013 to be $562 million, a hair lower than the average analyst estimate. The company's profit estimate, however, is just $41.5 million compared to $54.6 million expected by Wall Street. The discrepancy was caused by a weak holiday season, something that has plagued many other companies, as well as an unfavorable change in the product mix.
SodaStream's business model involves selling low-margin machines in order to facilitate the sale of higher-margin syrups and carbonators. The profit miss, then, was caused by selling more machines and fewer syrups and carbonators than initially expected.
While this could be a temporary issue, with syrup and carbonator sales simply lagging behind machine sales, it's possible that enough people are buying the machines, or receiving them as gifts, and then not using them. This poses a problem for SodaStream since its profit depends on syrup and carbonator sales.
The problem with SodaStream
SodaStream, I believe, is a niche product. There won't be a SodaStream in every household, and Coke and Pepsi won't suffer because people en masse begin making soda at home. There are two main issues holding SodaStream back from mass adoption.
The first is convenience. Now, being able to make soda and other drinks at home, without having to go to a store, may seem very convenient. But you still have to buy syrups, and you still have to buy carbonators. Used carbonators can be exchanged for new ones, but this must be done in a retail store due to US Department of Transportation regulations. Carbonators, whether used or full, are considered hazardous material and can't be shipped by UPS or FedEx.
This means that each time a carbonator needs to be exchanged, a trip to a participating retailer is necessary. Because of this, SodaStream doesn't have much of an advantage in the convenience department over store-bought soda.
The other issue is the lack of a value proposition. SodaStream states on its website that it costs $0.25 in order to make the equivalent of a can of soda using its machines. That is less expensive than a can of Coca-Cola bought in a 12-pack, typically around $0.35-$0.40 per can, but a two-liter bottle narrows this gap considerably, and can often be less expensive per ounce when on sale. The price difference between soda from a SodaStream and store-bought soda, then, is negligible in most cases. It's certainly much smaller than the price difference between coffee made at home and coffee bought at a coffee shop, for example.
With no real price advantage and a required trip to a store to exchange carbonators, there's isn't much driving consumers to use a SodaStream machine. They may buy one, but without offering much added value or convenience, there's little reason to continue to buy syrups and carbonators. That's the big problem with SodaStream's business model.
Is there a growth story?
Even with these issues, there's still a market for SodaStream, albeit a limited one. The product is environmentally friendly, with each use helping to reduce the number of plastic bottles which end up in landfills. Another benefit of the SodaStream is that it allows you to adjust the amount of syrup that goes into each drink, allowing for customization that's simply not possible with store-bought sodas.
Even with the lowered profit estimate, SodaStream still grew its revenue in the double digits year over year, and sales of machines don't look to be slowing down any time soon. If the company can get its product mix right, earnings should also grow in the double digits...as long as this trend continues.
The decline in the stock price puts the P/E ratio based on last year's earnings at about 18.7, a reasonable number considering the potential for earnings growth in excess of 20% going forward. But if the product mix problem is more structural, in that SodaStream users are simply giving up using the machines, the company is going to have a tough time growing earnings fast enough to justify even the current stock price.
The one thing that's true regardless of the nature of SodaStream's problems is that soda companies like Coca-Cola and PepsiCo aren't in any real danger at all. SodaStream is not a giant slayer; it's a niche product with the potential to capture a small part of the carbonated-beverage market at best.
Investors in Coca-Cola and PepsiCo shouldn't be worried about SodaStream. The real threat for these companies is the ongoing growth of bottled-water sales compared to soda sales. It's estimated that by the end of this decade, bottled-water sales will surpass carbonated-beverage sales, introducing a problem for the soda giants.
While soda carries high profit margins, bottled water typically doesn't, especially when sold in bulk. Both companies have struggled to win market share in the higher-margin enhanced water market, lacking the same brand power they enjoy in the soda market. SodaStream is the least of their worries.
The bottom line
While SodaStream has the potential to continue to grow its profits at double-digit rates for a while, the current product-mix issues are concerning. The current stock price looks attractive based on the assumption that these problems are temporary, but if that's not the case, then the stock is not a great deal. There's a risk that SodaStream has fad-like properties, with people buying the machines for the novelty and not actually using them very much, and that should be very concerning to investors.
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