For a year after I made the case that the market was in denial with respect to the strong investment thesis for SodaStream International (SODA), shares almost doubled to a high of $77.80 back in June. As noted in the chart below, shares have slid back to the mid $60s on the realization that a takeover was not imminent and that competitors might finally be entering SodaStream's market.
SODA Total Return Price data by YCharts
As investors look ahead to the next earnings release in a month and the upcoming holiday shopping season, there are a few key points on which to focus.
Growth has been stellar
SodaStream posted a 29% increase in revenue in the most recent quarter, prompting management to raise full-year guidance for revenue growth to 30%. Behind this strong top-line growth is further evidence that SodaStream is really gaining traction; growth in the sale of consumables including syrups and gas refills (+28%) outpaced growth in sales of new soda makers (+25%). In this "razor and blade" model, it is critical to SodaStream's long-term success that the growth in consumables keeps pace with the sale of soda makers.
Management expects this growth to continue, as evidenced by the company's goal to more than double revenue and achieve $1 billion in revenue in 2016. On the most recent earnings call, management even went as far as saying that $1 billion is "a very doable target. There's a lot of upside beyond that just in the markets that we are in right now." This confidence is based on a combination of the strength of SodaStream's operations and the massive size of the market; management recently noted that the company had just reached 1% penetration in the United States.
Innovation continues
In addition to the continued expansion of distribution channels both in the United States and internationally, SodaStream continues to build its moat through innovation. Examples range from built-in SodaStream systems in Samsung refrigerators, Whirlpool's upcoming debut of KitchenAid soda makers using SodaStream technology, new color-customizable machines designed by Yves Behar, single serve SodaCaps, and more.
Valuation remains attractive
In a frothy market where high-growth companies are trading at price to earnings ratios of 100 or more, shares of SodaStream stand out as being quite reasonably valued. Shares of SodaStream currently trade at a TTM P/E of 28 and a forward P/E of less than 20. Considering the analyst consensus that SodaStream can grow earnings by 27% annually over the next five years, shares are trading at a very attractive PEG ratio near 1.0. There are very few opportunities in today's market for a high-growth, solidly profitable business that is operating effectively while trading at such a reasonable PEG.
Competition is arriving... sort of
In recent weeks, most articles relating to SodaStream have focused on potential changes to the competitive landscape following Green Mountain Coffee Roasters' (GMCR.DL) announcement of its plan to release a home soda making machine called Karbon. More recently, Starbucks (SBUX -0.21%) announced its development of a carbonation device known as the Fizzio. Undoubtedly, it will be important to monitor these potential competitive threats as more information becomes available. Both Green Mountain and Starbucks have firmly entrenched positions in the coffee business and have demonstrated an ability to make products that consumers want.
There are a few key points to consider when monitoring the status of competition. First, there really aren't any specific details on either company's plans at this time. In fact, it is uncertain whether Starbucks has any intention of rolling out a version of the Fizzio for the home; flavors, functionality, and prices are completely unknown at this point. Second, SodaStream has been busily co-branding syrups with Ocean Spray, Country Time, Kool Aid, and other recognizable brands. Third, SodaStream has an often under-appreciated moat thanks to its international network of retailers that handle the sale and exchange of the gas tanks used to carbonate beverages; these tanks require special handling, so having an existing network of retail locations exceeding 13,000 in the United States alone is a significant first-mover advantage.
Finally, it is important to realize that all three companies can be successful in the home soda business given the tremendous addressable market. Just like Starbucks' Verismo didn't kill Green Mountain's Keurig in the battle for single-cup coffee brewing, there is no reason to expect competition to be the end of SodaStream's growth story.
Looking ahead
Looking ahead to the rest of 2013 and into 2014, there is very little reason to doubt that SodaStream can continue to grow at 30%. There is plenty of market opportunity, and most serious competition is still off in the distant future. With the company's growth expectation of $1 billion and revenue and net margins of 15%-18% by 2016, it is reasonable to assume that shares of SodaStream have room to double or triple over the next three years. Based on that expectation, it is unlikely that shares of SodaStream will stay "flat" in the $60s for very long.
