Jonesing for Trouble

Jones Soda (NASDAQ:JSDA) looks like a stock I should love. It boasts an innovative, unique brand that emotionally connects to customers. It's got a history of being offered in offbeat, niche locations. And a recent switch from high-fructose corn syrup to natural cane sugar for sweetening its beverages seemed like a genius move to me. I think it'd look downright cute with the other stocks in my portfolio. 

I must be getting conservative in my old age, though. As much as I think this is a groovy little company, Jones Soda's stock looks awfully expensive to me, even after its recent freefall in price. And I've got serious doubts about this decidedly indie company's big moves toward the mainstream.

Soda? So cool!
I really like Jones Soda in many ways. I've enjoyed the taste of a few of its diet drinks. I love the artsy black-and-white photographs on its bottles (user-generated) and the little "fortune cookie" sayings under its caps (ditto). You never get the same-old-same-old packaging.

And hey, how cool is it that Jones started out distributing its wares in places that heavyweights like Coca-Cola (NYSE:KO) or PepsiCo (NYSE:PEP) wouldn't touch, like skateboard shops and tattoo and piercing parlors? I can even handle its steps to distribute soda via large retailers that still complement the brand, like Starbucks (NASDAQ:SBUX), Panera, and Target (NYSE:TGT). (Starbucks has since demoted Jones from its lineup, though.)

Losing its edginess?
However, Jones is going for the mass market now, and that worries me. Although its move to cane sugar should satisfy food-conscious customers, its switch to cans seems more likely to alienate its fans. Will Jones Soda lose some of its quaint and eccentric appeal in the shift from glass to aluminum?

Furthermore, does Jones even belong in places like Wal-Mart (NYSE:WMT)? Given Jones's individualistic, high-end appeal, Wal-Mart's discount shelves seem like a poor fit for its beverages. And even if it extends awareness beyond its original fans, I can't help wondering whether some of its big moves will ultimately tarnish its brand.

I can see the appeal of Jones's deal with the Seattle Seahawks, but that decidedly mainstream organization seems like a far cry from Jones' original loyal customer base. At what point do all these deals and marketing moves become nothing more than commoditization -- a trend that seems to run afoul of Jones's traditionally non-traditional spirit? And what about the infrastructure that this small company needs to make such significant changes? Costs related to expansion dragged down Jones' disappointing first quarter, after all.

Furthermore, the company's still got a lot on its plate, including the creation of several new, lamentably mundane soft-drink flavors for several retailers and the stadium crowd. (Admittedly, I'd imagine sports fans would prefer cola, orange, and lemon-lime flavors to, say, FuFu Berry.) Jones also plans to switch to plastic containers and fountain distribution for stadium sales. The company is hoping that the Seahawks deal will lead to similar arrangements with other venues, but these are major changes for the company to navigate.

Breakneck growth? Don't trip
I have a funny feeling that Jones is trying to grow too far, too fast -- just like its share price. Even though Jones shares have dropped more than 40% in the past three months, they still don't look cheap to me. Despite its recent bloodbath, Jones is still trading at 81 times trailing earnings and 46 times forward earnings. It's got a P/S ratio of 10, and its PEG ratio is 2.61. Those are the kinds of ratios one expects from the tech sector, not a humble soda firm. And even in the lofty world of tech stocks, many investors find it hard to stomach the expectations such multiples carry.

Jones has shown some impressive growth in the past, and it expects even more for the next year or two. The Seahawks deal certainly shouldn't hurt, since thirsty fans, including children, will be a captive audience at the games. Patrons might balk at the absence of traditional favorites Coke or Pepsi, but since Jones calls Seattle home, it shouldn't be too hard a sell.

All the same, it's important to wonder whether Jones can live up to its lofty expectations for mass market acceptance. I'm clearly not the only one asking such questions, since shares have gone a bit flat recently.

In addition, Jones has tons of well-entrenched, resource-rich competition. Anyone who's checked the soda aisle of their local grocery store lately knows that Coke and Pepsi are rolling out a dizzying variety of new products to lure in consumers. And Hansen Natural (NASDAQ:HANS) remains another formidable competitor in the world of "alternative beverages." I'm not convinced that there's too much of a moat against such rivals.

Don't count on Jones' sugar-sweetened sodas to distinguish the company much, either. With the price of corn steadily rising amid demand from ethanol producers, few Fools should be surprised if many other soda companies reformulate their beverages to switch away from high-fructose corn syrup.

I really like Jones Soda and its history, and I'm glad the company has given thirsty consumers a choice beyond the usual Coke or Pepsi. However, I'd prefer a much cheaper price before I take a swig of its shares.

Starbucks is a Motley Fool Stock Advisor recommendation. Wal-Mart and Coke are Motley Fool Inside Value picks. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax owns shares of Starbucks. The Fool's disclosure policy comes in classic, diet, and cherry vanilla varieties.