If you're not familiar with SodaStream (SODA +0.00%), don't feel like you're out of the loop. The company has been growing at a good rate, and the stock has appreciated 78% over the past year, but 45% of SodaStream's revenue comes from Europe. In addition to its website, SodaStream sells its products through 60,000 retailers throughout the world, but only 15,000 of those retailers are located in the United States. Now, what does SodaStream have to do with Time Warner (TWX +0.00%)?
A win for both parties
SodaStream sports a market cap of $1.30 billion, making it a gnat-size nuisance to Coca-Cola (NYSE: KO), with a market cap of $175.89 billion, and PepsiCo (NYSE: PEP), with a market cap of $131.06 billion. However, SodaStream is in the infancy stages of being a threat to these two powerhouses.
SodaStream allows consumers to make their own soda at home, and the process is convenient (no carrying cases of soda from the supermarket to the car, no being told that you forgot to take the recycling bin out after a soda-can pile-up), cost-effective, environmentally friendly, customizable, and promotes health and wellness. That latter point is where Time Warner comes in.
SodaStream is moving toward the health-conscious consumer. Thanks to Earthbound LLC, which brought SodaStream and Time Warner's Cooking Light together, SodaStream and Cooking Light will offer naturally sweetened flavors that will be "fresh, fizzy, and fruity." The two first flavors to debut in the first quarter of next year will be Passionfruit-Mango and Kiwi-Pear. In simplest terms, this deal will lead to SodaStream offering fruit-based syrups that use all-natural sweeteners. SodaStream will use the angle of consumer empowerment and better living. Those points seem to be justifiable.
For Time Warner, this is yet another revenue stream added to the list. Time Warner owns HBO, Cinemax, Warner Bros., New Line Cinema, People, Sports Illustrated, and Time, among others. Also keep in mind that Cooking Light will likely advertise its new partnered products with SodaStream, which of course would benefit SodaStream.
All of this is exciting, and there's a lot of reason to be optimistic, but one massive threat exists.
SodaStream and big soda
It's no secret that the health-conscious consumer is killing sparkling beverages (soda) in the domestic market. However, consumers in emerging markets aren't as educated about the health risks of overconsumption of soda. Coca-Cola is seeing solid growth for still beverages in the U.S. (ready-to-drink teas, juices, coffees, bottled water), while PepsiCo is seeing consistent growth in snacks (primarily Frito-Lay and Quaker). Therefore, it's not as though Coca-Cola and Pepsi are desperate, as some people would make it seem. If that were the case, then one of them would have scooped up SodaStream when rumors swirled about an acquisition in the early summer.
Reportedly, PepsiCo was going to offer $2 billion for SodaStream. PepsiCo denied these rumors, which makes sense considering SodaStream's fiscal year 2012 revenue totaled $436 million. While it's possible that there was some form of fire related to this smoke, that seems like an extremely high premium. Furthermore, SodaStream aims for $1 billion in sales by fiscal year 2017. Exactly how long would PepsiCo have to wait to make a profit?
That said, anything is possible. If a young company like SodaStream poses a future threat to a more mature company, then an acquisition can't be ruled out. Some form of partnership is also possible. However, one other possibility poses a major threat to SodaStream.
Think about the enormous marketing power of Coca-Cola and PepsiCo. With that in mind, it's possible that these two companies are watching SodaStream's progress with the intention of creating their own products in the same market, which would put SodaStream in an extremely challenging position.
While SodaStream is a growing company with plenty of potential, as an investor, do you want to wake up one morning to see that SodaStream gapped down on this type of news?
SodaStream is growing faster than Coca-Cola and Pepsi on the top and bottom lines, but this should be expected:
SODA Revenue (TTM) data by YCharts.
Coca-Cola and PepsiCo still offer brand recognition, geographic and product diversification, tremendous marketing power, resiliency to weak economies and bear markets, and generous yields, 2.70% for PepsiCo and 2.90% for Coca-Cola. If either of these companies sees SodaStream as a significant threat, something will be done. The problem is that nobody knows if this would be a move that would benefit or harm SodaStream. Of course, if it was news about a partnership or an acquisition, then the stock price would gap up.
The bottom line
Do you want to gamble? If so, consider SodaStream. Or, consider allocating a small percentage of your available capital to SodaStream, treating it as a speculative play. If you would prefer to play it safe and receive generous dividend payments, Coca-Cola and PepsiCo are excellent options.
