Should You Bet on the Action at SodaStream?

Shares of beverage upstart SodaStream continue to be volatile as rumors swirl about a potential tie-up with a larger competitor. Should investors get a piece of the action?

May 5, 2014 at 8:30AM

Soda

Shares of beverage upstart SodaStream (NASDAQ:SODA) have performed generally poorly in 2014, thanks to rising costs associated with expanding the company's footprint around the world. The company's share price is still attempting to recover from a double-digit decline in January that was caused by the disclosure of a disappointing operating profit performance in the fourth quarter of 2013.

However, SodaStream's share price received a positive jolt in mid-April, due to rumors of a possible strategic investment by a larger beverage competitor, like Starbucks (NASDAQ:SBUX) or PepsiCo (NYSE:PEP). So, amid the volatility, is SodaStream a good bet for investors?

What's the value?
SodaStream is the top player in the at-home carbonated-beverage market, with global sales of 4.4 million machines in 2013.  Like Keurig Green Mountain in the at-home coffee market, SodaStream sells its machines at minimal markup, hoping to make its money on the back-end through sales of accessories, mostly refill cartridges and flavor bottles.  The so-called razor-and-blades strategy has been a winner for the company, propelling a 332.8% top-line gain over the past five fiscal years.

In its latest fiscal year, it was more of the same for SodaStream, as evidenced by a 29% sales increase that was a function of strong demand for both its machines and accessories. On the downside, though, the incremental sales required heavy promotions in order to push consumers through the purchasing process, a fact that sharply curtailed the company's gross margin. The net result for SodaStream was weaker operating cash flow, negatively impacting its ability to fund the buildout of its supply chain infrastructure around the world.

The beverage giants smell profits
Of course, much of SodaStream's focus is on the U.S. geography, a market that management believes to be a $40 billion opportunity, a far cry from the $123 million that the company generated from the area in 2012. The long runway of potential growth explains why SodaStream is spending heavily to gain critical market share in the U.S., as highlighted by its larger media buys and the hiring of a brand ambassador, actress Scarlett Johansson. 

The growth opportunities in the region would also explain why the U.S. beverage giants might be interested, given their almost certain desire to get a piece of the at-home beverage pie.

While Starbucks' core coffee business continues to hum along, with solid comparable-store sales gains across its geographies, the company increasingly has had to look beyond its trademark product in order to support its heady market valuation, including the reported addition of made-to-order sodas to its store product lineup in 2014. The company's modus operandi for gaining critical mass in non-core areas has been to buy rather than build, as highlighted by its recent acquisitions of Teavana and La Boulange in the tea and baked goods categories, respectively. 

SodaStream would certainly be a much larger nugget for Starbucks to swallow, but it would be easily doable for a company that generated more than $1.7 billion in adjusted free cash flow in its latest fiscal year.

PepsiCo, in contrast, has been struggling to find growth in its beverage business, especially in the North American market, where consumers have anecdotally been souring on sugary carbonated beverages.  Part of the reason for its poor operating performance may be the inroads that SodaStream has made in the carbonated-beverage area with its machines and growing lineup of flavors. SodaStream sales seem to have likely benefited from an avoidance of ingredients that have questionable value, like high-fructose corn syrup and artificial flavors. 

An acquisition of SodaStream would give PepsiCo the top position in the at-home carbonated-beverage market. A deal would also help it to check competitor Coca-Cola's recent moves in the space, such as making a major investment in Keurig Green Mountain, helping to fund the latter's rollout of an at-home cold-beverage machine in 2015.

The bottom line
SodaStream is investing for the long term, a Buffett-esque strategy that has dented the company's near-term profit picture but will likely pay strong dividends down the road. Given the high costs of competing against the megamarketers like Coca-Cola and PepsiCo, some sort of tie-up with a well-heeled partner is a likely outcome for SodaStream, although betting on an outright acquisition would seem to be a fool's errand. As such, short-term traders would be wise to look elsewhere for gains, but long-term investors should see a gem in SodaStream.

Will this stock be your next multibagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Robert Hanley has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, PepsiCo, SodaStream, and Starbucks. The Motley Fool owns shares of Coca-Cola, PepsiCo, SodaStream, and Starbucks 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