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Why This Company Is the Best Soda Play

Mark Lin
January 21, 2014

As consumers become increasingly health conscious, they are shifting from classic colas produced by Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP) to low- or zero-calorie drink options. This bodes well for SodaStream (NASDAQ: SODA), a manufacturer and distributor of homemade soda makers. With SodaStream's soda makers, soda drinkers can get their daily dose of soda with two-thirds less carbohydrates, calories, and sugar than their regular off-the-shelf counterparts. SodaStream isn't just a great product for consumers--it is also an attractive investment play on the at-home soda market.

Market penetration
The growth rate of any company is largely a function of industry growth and market share gains, particularly the former. The U.S. of carbonated soft drinks (CSDs) market is a very mature market. Since the time the first bottle of Coke was sold in the U.S. in 1886, almost everyone in the country has drank at least a soda in his lifetime. This places a natural cap on how many more cans of soda Coca-Cola and PepsiCo can sell every year.

On the other hand, SodaStream estimates that the U.S. household penetration rate for home carbonation systems is at a low 1.1%. With Sweden's penetration rate estimated at 25%, there is ample room for SodaStream to grow further.     

Revenue stability
Traditionally, soda drinkers have been fiercely loyal to their chosen brands. For example, when Coca-Cola replaced its classic Coke with a new formulated version in 1985, the backlash from its customers forced it to relaunch its classic Coke within months.

However, with the health and wellness trend contributing to lower CSD sales in recent years, it seems that while consumers have their favorite soda brand, there is nothing to stop them from switching away from sodas altogether. The key is that every soda sale is a one-off transaction -- Coca-Cola and PepsiCo must keep selling the same number of products every year to maintain the same revenue level as the previous year.

In comparison, SodaStream operates on a classic razor and razor blade revenue model. As SodaStream's installed base of customers who bought its soda makers