Soft drink veteran Coca-Cola (KO) has been a popular investment for decades. The stock offers a comfortable blend of generous dividends, solid long-term business growth, and a large portfolio of household-name beverage brands. But Coke has also underperformed the broader market and key competitors in recent years, and some investors say that the company is running out of untapped markets.
Read on to see Coca-Cola's bullish and bearish qualities, as presented by two of The Motley Fool's consumer goods writers. These diverse analyses will help you build your own Coke strategy, accounting for the company's strengths as well as its weaknesses.
Coke's turnaround recipe: Innovation, outsourcing, and AI
Anders Bylund (Coca-Cola Bull): Like any other company, Coke has its shortcomings. The soft drink giant's sales took a harder hit from the COVID-19 crisis than archrival PepsiCo (PEP -0.62%), since Pepsi's large portfolio of snack foods softened that company's fall. Some bearish investors argue that Pepsi's more diverse product mix is a healthier business platform than Coca-Cola's sharp focus on various beverages. As a result, Coke's stock has lagged behind Pepsi in the coronavirus era.
But that's not the whole story. Despite its skinnier revenue streams, Coca-Cola's leaner business model generates far wider profit margins and free cash flows in the end. That's the power of outsourcing most of the production and distribution to a global network of partners and subsidiaries:
KO Profit Margin data by YCharts
Furthermore, I see Coca-Cola as a more innovative company than any of its chief rivals. For one, the conversion of in-house operations to outsourced partnerships continues. The company recently sold its Philippine operations to Coca-Cola Europacific Partners and a private equity firm, for example. That move puts nearly $2 billion of fresh cash in Coca-Cola's coffers while removing a low-margin contributor from the company's business mix. Coca-Cola is leaning into its margin-friendly restructuring effort.
And I don't know if you've noticed yet, but Coke has already engaged in the ongoing artificial intelligence (AI) mania. The advertising giant that gave Christmas its now-familiar red and white color scheme in the 1930s now runs ad campaigns featuring AI "magic." Some of the new flavors you've seen from Coca-Cola in recent months were even developed with AI tools. This traditionalist is not afraid of trying new strategies.
The innovative spark doesn't end there. Coke's fresh ideas include ready-to-drink cocktails and a vitaminwater island in Epic Games' Fortnite world. In short, Coca-Cola isn't sitting on its hands. Rather, the company is pulling out all the stops to rekindle the growth that was lost in 2020.
So Pepsi may have a comfortable safety cushion but Coca-Cola looks ready to generate robust growth in 2024 and beyond. That's what I expect when the C-suite team has its gaze fixed on the long-term horizon.
"We're building this business for the next century, not just the next quarter," CEO James Quincey states in his official profile. Those words are both sweet and sparkly to my ears. You could call Coca-Cola a turnaround story today, but I see tons of shareholder value flowing from its AI-assisted innovative spirit in the coming years.
Are you looking for a market underperformer?
Jennifer Saibil (Coca-Cola Bear): Coca-Cola stock hasn't beaten the market in about 30 years. That's a long time to see your money underperforming, knowing that all it would take is an index fund to make it work harder. Oh, and that includes the famed dividend. In fact, Coca-Cola's total return is less than half of the S&P 500's over the past 10 years. And it's not getting better. As we get close to the end of the year, the S&P 500 is up 23% while Coca-Cola stock is down 8%.
Coca-Cola already has around 35% of the market in developing countries, which is a huge amount considering all of its competitors. It has about half the market for users of commercial beverages in developing countries. That's only about 30% of the total, but it may not increase to the rest of the population anytime soon. In other words, it will be an uphill climb to capture greater market share.
Is it going to get better? After this much time, it doesn't seem likely. Coca-Cola is feeling more pressure this year as shoppers switch to cheaper brands, and that could change in 2024. Considering the stock's dismal performance this year, it could bounce back next year. But long-term, there may not be enough growth levers to push past the market.
