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A Hedge Fund Investor Reveals His Bullish Case for SodaStream International, Ltd.

A SodaStream Pure machine.
Source: SodaStream.

What's fascinating about a company like SodaStream  (NASDAQ: SODA  ) is the simplicity and longevity of its current business coupled with the widespread uncertainty regarding its future.

For over a century, SodaStream has employed a simple "razor and blade" business model to deliver carbonated beverages -- of which the world consumes an estimated 251 billion liters (by SodaStream's account) annually -- to thirsty customers. It generated $563 million in revenue doing just that in 2013.

Still, incredible skepticism about SodaStream's future prospects persists. Underlying the bearish argument is a profound belief that not only will the beverage maker struggle to maintain a breakneck pace of growth, but that one of three daunting obstacles could ultimately lead to its irrelevance. These obstacles include the following:

  1. A sudden plateau in the adoption rates of do-it-yourself soda makers in the all-important American market -- or the "fad" thesis;
  2. The impending entrance of a veritable "goliath" (or two) -- see Coca-Cola and Keurig Green Mountain -- that will beat SodaStream at its own game; or
  3. The not-too-farfetched belief that SodaStream's in over its head operationally due to a lack of understanding of core markets, a tumultuous geopolitical situation in Israel, and an inability to balance rampant growth with the need to maintain a certain "cachet" around its product.

All of these concerns have led to a plethora of negativity and short-selling activity around SodaStream's stock. On a volume basis, the short interest currently amounts to 40% of the outstanding shares, but this figure has peaked as high as 75% during the past year.

Incidentally, one value investor who's all too familiar with shorting overhyped companies believes the bearishness on SodaStream is way overdone. That investor is Whitney Tilson, the founder of the value-oriented fund Kase Capital Management, former guest columnist, and, ironically, longtime bear on Keurig Green Mountain.

I wrote briefly about Tilson's bullish stance on SodaStream last month, but he recently presented a much more in-depth presentation on the company entitled "Why I'm Long SodaStream" at the Value Investing Congress on April 3.

In the presentation -- which I have embedded below -- Tilson reveals that he purchased SodaStream shares in early February at an average price of $37.65 to initiate a 4% position in his portfolio. To arrive at his investment decision, he conducted substantial research and surveys that convinced him of SodaStream's staying power as a desirable product and viable business model.

Before we launch into the full-blown investment slide deck, here are some of the most interesting takeaways behind Tilson's bullish thesis on the DIY soda maker:

  • It offers consumers a value proposition with five key benefits: a soda machine that is (1) cost-effective, (2) convenient, (3) accommodating to a variety of preferences, (4) healthy, and (5) environmentally friendly.
  • SodaStream is primarily for sparkling water drinkers who occasionally desire flavored beverages. Tilson believes SodaStream is "not primarily a competitor to traditional sodas like Coke, Diet Coke, and Pepsi" and states that its counterpart cola flavorings "taste terrible in my opinion."
  • Instead of colas, SodaStream's "best and widest variety of flavors are fruit-based."
  • Its current position reminds Tilson of his investment in the Deckers shoe business years ago. The similarities between the two include (but are not limited to) a beaten-down, heavily shorted stock, addressable operational problems, a huge worldwide market, and a proven business selling at a reasonable valuation.
  • There's a mistaken view that SodaStream is a "fad," and Tilson's survey of 393 consumers shows a high affinity for SodaStream's core product. This finding was a "critical element" in Tilson's decision to buy the stock.
  • SodaStream's worldwide revenue growth of 26% and soda maker unit sales growth of 39% in the fourth quarter of 2013 was more indicative of long-term potential than temporary issues in the U.S. market.
  • The margin crunch experienced in the fourth quarter was acceptable to increase SodaStream's active user base. Tilson notes that "[O]ne could argue that SodaStream should tolerate 0% gross margins" if it boosted household penetration.
  • The U.S. market will trend toward more consumables versus soda makers over time and thus increase profit margins.
  • Even if growth estimates are overblown, Tilson believes that the company can "ratchet back" marketing and advertising spending to boost profits if increasing the installed base proves challenging. He notes that SodaStream's "Western Euroepan business alone is worth nearly the entire current market cap." Oh, and the same goes for SodaStream's CO2 refill business.
  • SodaStream has a large moat due to (1) a global distribution network and retail footprint, (2) expertise in canister logistics, (3) a strong brand, (4) its installed base of 7 million units, (5) partnerships, and (6) experience in and breadth of manufacturing operations.

Finally, despite the announcement that beverage powerhouses Coca-Cola and Keurig Green Mountain are entering the ring soon, Tilson remains unimpressed, noting:

I can find no evidence that any competitor is gaining traction. The key concern for me isn't the possible emergence of direct competitive threats, but rather that SodaStream has already penetrated most of the home carbonation market and thus revenue growth will continue to decline.

Ultimately, Tilson views SodaStream as a growth opportunity with very limited downside, essentially an ideal stock for an investor who leans toward the "growth at a reasonable price" or "GARP" mind-set.

From this angle, Tilson's been right before, as he points out using his Deckers analogy, but only time will tell whether SodaStream's business issues are as easily remedied as he currently believes. While considering the bearish arguments I noted previously, investors should take a closer look at Tilson's predictions in the slide deck that follows.

Will SodaStream survive the at-home soda wars? Source: SodaStream.

What do you think? Are you convinced one way or another about the future of SodaStream? Sound off in the comments box below.

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Whitney Tilson Why Im Long SodaStream by ValueWalk

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  • Report this Comment On April 09, 2014, at 8:08 PM, Pancakes22 wrote:

    It bugs me that he does not understand statistics.

    A percent cannot be over 100% when conducting a survey.

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Isaac Pino

Isaac covers the companies that constantly push the world forward, from the engines of innovation like GE and Google to the rule breakers like Chipotle and Whole Foods. He admires the leaders that embody the philosophy of Conscious Capitalism.

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9/3/2015 3:59 PM
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SodaStream CAPS Rating: **