Buy This Beverage Game Changer Instead of Coke

Investors can easily lose money by investing in fads. Many businesses come up with "hot" products that lack long-term usefulness. Crocs is one of the best examples of this. Its shares quintupled in just a couple of years after its 2006 IPO to hit $70 per share, but now trade for less than $15.

Even still, the market gets it wrong sometimes by confusing a viable product with a fad. SodaStream (NASDAQ: SODA  ) is over 50% off its 52-week high with a short interest of 33%. A perfect storm of bad news has pushed the stock to multi-year lows. However, for investors who are willing to focus on the long term, now could be a great buying opportunity. It's also a feel good, environmentally friendly story, as it helps cut down on plastic bottle waste. 

Coke's entry into at-home beverages
Coca-Cola (NYSE: KO  ) is hoping to get into the at-home beverage market through a partnership with Keurig, but it still lags SodaStream in terms of infrastructure. Coca-Cola now owns 16% of Keurig, up from its initial 10%. However, CO2 cartridges require a network and expertise to build, two things that SodaStream already has. 

SodaStream's business model
SodaStream makes money from selling the machine, the bottle, the carbonation and the syrup. The carbonation and syrup provide recurring revenue streams. Its business model doesn't require much capital and its gross margin is 50%. SodaStream also has a strong presence internationally--Western Europe has seen revenue growth of over 30% for the past two years.

The company's operating margin is currently being held down by sales of machines in the U.S. But once it has a large base of installed machines, its margin should start to rise. That's because the consumable products that SodaStream offers have higher margins. Switzerland is a mature market, saturated with machines, where consumables make up 80% of the company's sales. As a result, it has a 25% operating margin there, compared to an operating margin of 5% in the U.S.

Partnership opportunities
The speculation that PepsiCo (NYSE: PEP  ) might buy SodaStream is dying down. That doesn't mean the two couldn't partner together, or that PepsiCo wouldn't make an equity investment in SodaStream. However, PepsiCo remains in an active battle with activist billionaire Nelson Peltz, which has been going on for a while now. Peltz is pushing for a spin-off of PepsiCo's snack and beverage business. PepsiCo believes that offering both beverages and snacks provides unrivaled synergies, and that the combination gives the company negotiating power with purchasers.

Last year, SodaStream added Wal-Mart as a partner and started selling SodaStream products in Wal-Mart stores. Other potential opportunities include eventually working with major refrigerator manufacturers to install SodaStream machines.

How the shares stack up
SodaStream looks to be one of the best investments around, and not just in the beverage industry. The shares trade at a P/E to growth ratio of only 0.66. The stock actually trades below either Coca-Cola or PepsiCo on a price-to-earnings basis. What you will get with Coca-Cola and PepsiCo are solid dividends, as both yield 2.9%.

Bottom line
Coca-Cola's partnership with Keurig might not be as big of a threat to SodaStream as many fear. SodaStream's strong recurring revenue and presence abroad make it a compelling investment. For investors looking for a solid play in the beverage industry, SodaStream is worth a closer look. 

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Comments from our Foolish Readers

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  • Report this Comment On June 30, 2014, at 7:21 AM, cowboy2014 wrote:

    Sodastream is the buy of the century!!!!!!!!

    Once Coca-Cola releases their syrup on any machine even Keurig, Sodastream users will be able to use it as well. Sodastreams installed base market power will trump any other companies product lines. Sodastream is smart by selling as many machines as possible so that when Coke syrups are available people won't buy keurig machines they will simply use the syrup with sodastream carbonated water. Carbonation refills will rise and US margins will soar. Super simple and Coca-Cola got it ALL WRONG. It was never about the MACHINE it was all about the INSTALLED BASE.

  • Report this Comment On July 01, 2014, at 12:38 AM, ChristopherHamel wrote:

    Sodastream still isn't as convienient as it could be. I hope Sodastream will continue to innovate and be confident enough to cannabalize its own products, especially if Keurig can innovate a machine that doesn't require as many steps as Sodastream.

    If Keurig cold really turns out to be as simple as inserting a pod and pressing a button, there may be significant market share loss by Sodastream. The convenience factor may matter more to the average anonymous consumer than the health and environmental benefits.

    Is it possible to chemically / mechanically create CO2 and quickly cool the beverage via depressurization (Joule Thomson Effect)?!

    Sodastream must out innovate the competition. There is a real risk their CO2 distribution network may become an abandoned railway.

    CH, Long SODA

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