Shares of SodaStream International (NASDAQ: SODA) have been battered and bruised since the company's third-quarter earnings announcement in November. Shares fizzled another 4% recently after an analyst downgrade. The company's fundamentals however continue to show that SodaStream offers double-digit earnings growth at a significant discount to its competitors. It's also honed in on several cultural trends which favor its continued adoption by consumers.

Capitalizing on cultural currents
SodaStream sells several lines of colorful, at-home, carbonated beverage makers. The units generally sell for $100 and include a reusable carbonator that can be refilled at several big-box retailers. Unlike its competitors Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP), the company's products are environmentally friendly, reduce waste, reduce storage and offer more convenience. Its soda flavorings have just 35 calories per serving and don't come with any high-fructose corn syrup or aspartame.

SodaStream, with a market cap of  just $1 billion, has plenty of room for market-beating growth. Meanwhile, Coca-Cola and PepsiCo are meandering along at just 8% growth, with stock valuations that are awfully tough to justify. Both soft drink stalwarts also face continued pressure from health advocates, parents and increasingly discriminating consumers. In fact, sales of diet sodas were off 7% this year as numerous studies continue to call artificial sweeteners into question. Adam, I like how you ticker two more companies here, but we need more analysis relative to SodaStream on each in order to justify the tickers. 

Image courtesy of SodaStream

Pouring profits
SodaStream is hoping to capitalize on holiday shopping this year by offering numerous online promotions, including a $25 rebate on its soda machines. Of course, the company doesn't really make its money on appliance sales. SodaStream profits when consumers buy its high-margin drink flavoring mixes. The company offers all of the traditional soda flavors, diet drinks, teas, sparkling water, as well as Ocean Spray flavors, and even cocktail drink mixes. The company also just launched a new line of SodaCaps, which resemble the K-Cups made popular by Green Mountain Coffee Roasters.

Fad or fixture
The problem for SodaStream's stock growth however, is one of sentiment and perception. Even though shares trade at just 16 times forward earnings and enjoy revenue growth of nearly 28.5%, the shares are down 47% from a 52-week high of $77.80 in June.

Over the summer there was considerable buzz that SodaStream might be bought out by PepsiCo and the shares spiked. After PepsiCo officially quashed those rumors the stock began sliding and hasn't regained traction since.

So what gives? It appears that analysts haven't made up their mind about whether SodaStream is a genuine kitchen fixture or a passing fad. Despite a 27% increase in soda machine sales last quarter, there were concerns about the paltry 7% gain in flavor sales.

A closer look at the issue however reveals that SodaStream analysts have more of a problem with semantics than actual sales growth. That's because sales of flavor syrups were actually up 53%. The company is forced to report sell-in numbers, versus sell-out. Meaning, the 7% gain reflects orders by retailers, while the company's actual sales to customers were significantly higher. The lower sell-in numbers were attributed to inventory management problems by retailers, not an issue of decreased demand by SodaStream consumers. 

A sparkling opportunity
At a recent price of $52, SodaStream's shares would trade nearly 26% higher if they were valued at a PEG ratio of just 1.0. Even more astonishing, if the stock traded at a more realistic PEG of 1.4,  the shares would sell for $93 – a 77% premium over its recent price.

By way of comparison, large cap stocks like Coca-Cola and PepsiCo trade at rich PEGs of 2.61and 2.37 respectively. Lofty valuations, considering that Coca-Cola has saturated the world's market and long-term growth is declining both in terms of sales and consumer interest. PepsiCo fares better but because 40% of its revenue comes from its popular salty snacks division -- not soda. It's little wonder that both stocks are underperforming the S&P 500 Index this year.

On the other hand, SodaStream's valuation is being held down by several external factors including heavy short interest, a wait-and-see attitude by institutional investors and overblown analysts' concerns. Clearly, there's a considerable amount of value and growth bottled up in the stock.

The stock trades well below its potential and this has created an opportunity for patient investors, whose measured restraint may pay off handsomely in the future. With so little expectation baked into the current share price, investors would do well to partake in SodaStream's bubbly future.


Fool contributor Adam Bourque owns shares of SodaStream. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of Coca-Cola, PepsiCo, and SodaStream. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.