Since the beginning of Nov. 2012, SodaStream's (SODA +0.00%) stock has blown up, rising more than 80%. Yesterday, the stock jumped 12% the day after a presentation in which SodaStream laid out the future of the company in great detail for a group of investors and analysts. "Ambitious" seems to be a pretty accurate description of the plan. In summary, SodaStream says that it wants to "elevate the home soda category into a mainstream alternative to store-bought soda."
For a long time, I thought that the system SodaStream had in place was too open to competitors, and that the moat was too small to sustain the business. Reexamining the company, and comparing it to the model that Green Mountain Coffee Roasters (GMCR +0.00%) uses, has given me a different outlook on things.
The sustainability of the razor-and-blade model
The razor-and-blade analogy is used constantly to describe businesses that sell a permanent base at a loss or cost, and then make all of their money from the disposable units that make the base meaningful. SodaStream and Green Mountain both use a very similar version of this system, selling a base that consumes the high-margin pods that make the systems work.
SodaStream's consumables accounted for 61% of the company's revenue last quarter. Over the last three years, consumables have crept up as a percentage of total sales, although margin has not yet followed suit. Some of that suppression has come from production issues -- the company had to spend more than anticipated to expand manufacturing to meet demand -- but the issues aren't related to sales issues. With the end of those problems, SodaStream believes it is now well poised to grow its margins.
Green Mountain has had more success, with gross margin up slightly to 6 percentage points in its last quarter. The discrepancy between the two companies is the reason that I've paused to reflect on the future of SodaStream.
Where SodaStream can go
The problem has always been the competitive moat. SodaStream's product is seemingly the kind of thing that a clever person could assemble over the course of a weekend with parts from a Ford Firebird. The important thing about a shallow moat -- and the part I overlooked -- is that the clever person actually has to do something. So far, no other company seems interested in the market that SodaStream is tapping into -- the moat doesn't need to be deep.
Even if the company did come under pressure (ha!) from another competitor, it may still succeed just given its prevalence in the market. Green Mountain has had no trouble overcoming the Starbucks (SBUX 4.76%) Verismo brewer. It doesn't even seem to matter that the Starbucks model brews more kinds of coffee and comes with the Starbucks branding. Green Mountain's early dominance made it too difficult for other companies to overcome.
The bottom line is that SodaStream still has a lot of room to run, with margin expansion on the horizon. I'm still not willing to say that it's a "hold forever" company, but it might be a good investment over a shorter timeline. The downside is that the stock's rapid rise has resulted in a P/E pushing 30, but that's right in line with Green Mountain and less than Starbucks. I'll leave it to you to decide if it's worth it.
