Is Keurig Cold Overhyped?

Keurig Green Mountain's partnership with Coca-Cola has created a lot of buzz around its Keurig Cold platform. Is the hype warranted, or could the platform be a complete disaster?

Apr 12, 2014 at 1:00PM

There has been nonstop buzz about Keurig Green Mountain's (NASDAQ:GMCR) at-home carbonation system, dubbed Keurig Cold, ever since the company announced a partnership with Coca-Cola (NYSE:KO). The partnership guarantees that the greatest portfolio of beverage brands in the world will be available on the Keurig Cold system. However, serious questions remain as to when -- or even if -- Keurig Cold will hit store shelves. The answer has profound implications for Keurig Green Mountain investors.

Still under development
Keurig Green Mountain's stock price rocketed over 50% in the days following the announcement of its $1.25 billion partnership with Coca-Cola. The soft drink giant received a 10% stake in Keurig Green Mountain and will make various unspecified brands available for use with Keurig Cold. Keurig Green Mountain says it also plans to partner with other beverage companies, in addition to developing its own brands, to expand the platform's offering.

Tmfimg

Source: Keurig Green Mountain.

Keurig Green Mountain hopes to launch Keurig Cold in its fiscal year 2015, which begins in October 2014. Despite the media frenzy about the Coca-Cola deal, many investors question whether or not Keurig Cold can become a legitimate player in the at-home carbonation market. Management has not yet committed to a specific launch date, suggesting that the technology is still being developed.

Unlike SodaStream's soda maker, Keurig Cold does not require CO2 cartridges. However, it is not clear how the system will carbonate beverages,  and some investors wonder if even Keurig Green Mountain knows how the system will do it. Value investor Whitney Tilson calls Keurig Cold "vaporware" -- a term used to describe publicly announced products that never make it to market. If Keurig Green Mountain cannot develop a workable carbonation technology, Keurig Cold may never be introduced.

However, given Coca-Cola's large investment in the company, it seems fair to give Keurig Cold's technology the benefit of the doubt. Even if Coca-Cola made the investment purely for exposure to the booming at-home coffee market, surely it would not lend its name to a product that is destined to flop. I think there is a good chance something comes to market, even if it is not a SodaStream killer.

The price isn't right
Even if Keurig Cold's technology were perfected, the value proposition is still unclear. Coffee pods are priced much higher per pound than traditional coffee ground packages; single-serve pods for brands like Folgers Black Silk regularly come out to over $50 per pound – pricier than all but the finest of coffees. Of course, with pods selling for less than a buck apiece, the consumer hardly notices the exorbitant price-per-pound.

It is far from certain that consumers would be willing to pay more for a pack of pods than for a 12-pack of Coke cans, however. If a 12-pack of Coke costs $4.49, or $0.37 per 12-fluid-ounce serving, why would a customer pay even $4.99 for a 12-pack of Coke pods? Keurig Cold will not be a time-saver like instant coffee brewers; customers can instantly drink the can of Coke. While avid soda consumers can save space by buying pods instead of cans, the average consumer may be more concerned about the kitchen counter space taken up by Keurig Cold rather than the refrigerator space taken up by cans. 

Of course, there are many reasons why some consumers would want to own a Keurig Cold. In addition to saving refrigerator space, not having to carry heavy 12-packs in from the car, and not having to recycle the bottles are a few of them. In addition, some consumers may want to use the device simply for carbonated water. Since Keurig Cold does not require CO2 cartridges, it likely uses the pods to carbonate the drinks. Paying $100-plus for the Keurig Cold may be a good investment for these customers if cheap seltzer pods are available.

However, given that the utility of at-home carbonation may not have the same widespread appeal as at-home coffee brewing, carbonated pods may not achieve the same price premium as coffee pods. As a result, the profitability of the endeavor is highly uncertain.

There are a lot of ways that Keurig Cold could be a flop; the technology must be developed and the value proposition must be enticing. The uncertainty regarding both of these factors should make investors skeptical that the jump in the stock price is really warranted.

Keurig Green Mountain's fate hangs in the balance
Keurig Green Mountain's future profitability depends almost entirely on the successful launch of two new brewers: Keurig 2.0 and Keurig Cold. Investors should carefully consider the concerns about the Keurig Cold before attributing a high likelihood to its success.

Tmfimg

Source: Keurig Green Mountain.

Keurig 2.0 is the means by which the company hopes to regain its competitive advantage. The new system utilizes electronic reader technology that brews only licensed K-Cups, keeping unlicensed pods from being used in the system and from driving down pod prices. However, with Keurig 1.0 brewers installed in 13% of U.S. households, it is unclear whether Keurig 2.0 can penetrate enough households to reestablish a meaningful competitive advantage, especially when millions of U.S. households already own a perfectly good Keurig brewer.

Takeaway
As a result of the deep concerns about Keurig Cold's viability, doubts about Keurig 2.0's market potential, and the company's astronomical stock price (30 times trailing earnings), Keurig Green Mountain stockholders should seriously consider whether or not it still makes sense to own the stock. If either device turns out to be a flop, the stock price could plummet. Buyers, beware!

6 stock picks poised for incredible growth
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Ted Cooper owns shares of Coca-Cola. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, and SodaStream. The Motley Fool owns shares of Coca-Cola and SodaStream and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers