The U.S. is a tough crowd for SodaStream (SODA +0.00%), and Barclays Capital has become the latest Wall Street pro to cool on the former growth darling. Barclays lowered its rating from a bullish "underweight" to a neutral "equal weight" last week, slashing its price target to $35 along the way.
Thursday's downgrade doesn't exactly come as a shock, given SodaStream's uninspiring first quarter, reported earlier this month. The only real surprise here is the timing. SodaStream announced its results more than a week before Barclays decided to make its move lower. What took Barclays so long?
The execution and competitive risks that Barclays sees in the U.S. were apparent when SodaStream reported that sales in this country were down 28% during the first three months of this year. However, with international sales rising a healthy 20% -- backed by strong growth in Europe, which is still a larger and more established market for SodaStream -- is it right to write SodaStream off based on some potentially short-lived setbacks in this country?
Red, white, and black and blue
Now, it's perfectly fair to be disappointed at its recent performance. SodaStream is an Israeli company, but Western Europe drives more than half of its revenue. It's been the in-home carbonation standard for years there, with a presence in more than 10% of the homes in four different countries. We're at a penetration rate south of 2% here, but we're sill in the early stages. The market's panicking about the U.S. -- instead of celebrating SodaStream's success everywhere else -- because even at this initial phase of stateside expansion the Americas are accounting for nearly 30% of the revenue mix. No one outside of perhaps Mexico rivals the U.S. in soda consumption per capita, making its stateside push that began four years ago so important.
The U.S. is so important to SodaStream that it chose a popular American actress as its global spokesperson. The budding pop star also bucked conventional wisdom by springing for back-to-back Super Bowl ads. Between the stateside marketing blitz and Scarlett Johansson on board during the first quarter -- and a new exec brought in to tackle its U.S. challenges late last year -- the 28% drop reigns as a colossal disappointment.
You didn't hear a lot of people point out how SodaStream is so worldly that it was able to overcome its stateside collapse by still posting marginally positive sales growth. As bad as the quarter was, few were applauding that it actually beat Wall Street's top- and bottom-line targets for the period. Yes, the U.S. has been in a funk since sales in the country dipped during last year's third quarter and caused margins to collapse during the holiday quarter. Clearly, retailers are still working through the excess of unsold holiday inventory, and it's a big enough problem that margins as a whole for SodaStream have imploded.
It's been a bad run these past three quarters. Stateside flavor sales fell during the third quarter of last year. Sales bounced back during the holiday quarter, but margins took a beating on poor product allocations during the fourth quarter. The first quarter brought the worst of both periods.
That doesn't mean Barclays is right, though.
Barclays is worse than its bite
"We believe the risk/reward is weighted more heavily toward risk," Barclays argues, but it may not be that bad. For starters, SodaStream sees growth improving during the current quarter, accelerating sharply in the second half of this year. Barclays explains how Wal-Mart (WMT 1.83%) is giving SodaStream additional prime selling space this summer, a move that should not only help SodaStream clear out inventory but also help educate a segment of the market where making flavored soda at home is more than just a wellness and freshness novelty or part of an eco-friendly crusade.
It's true that competition is coming. Cuisinart has been trying to make waves since snapping up Primo Water's Flavorstation technology two years ago, and Keurig Green Mountain (GMCR +0.00%) expects to enter this market at some point in its fiscal year that begins in October, with Keurig Cold. Neither company can be easily dismissed, but it's hard to take either one seriously in this market.
Cuisinart is best known for its food processor, but it's been a force in small kitchen appliances since the 1970s. It's been in the market for more than a year, but with low adoption rates for its SMS-201 beverage maker and early buyers now burned by the scarcity of outlets selling the CO2 refills, will anyone trust Cuisinart's next foray?
Keurig Cold is a more challenging threat, but it's little more than vaporware at the moment. It got a major credibility boost when it secured an investment from the world's largest soda company and the promise of having Coke, Sprite, and other major brands available as flavors. However, those promises also come with the likely assumption that it will be a more expensive machine to operate. Keurig Green Mountain saw what happened when food giants tried to push their costly value propositions in the realm of single-serve coffee. It only validated the field by educating the market. History may be about to repeat itself, only this time in SodaStream's favor, with other companies footing the bill on the merits of making fresh soda at home.
This isn't new to SodaStream. The arrival of brand-name competition has done more good than harm for SodaStream throughout Europe in recent years. Yes, things are a mess in terms of operations. SodaStream may also be setting itself up for a fall this year by sticking to a 15% top-line guidance target for all of 2014 that implies sales will grow at a roughly 25% clip during the latter half of this year. That just doesn't seem realistic. However, the stock has already shed more than half of its peak value at a time when sales growth and margin pressures may have bottomed out.
Buying SodaStream here is certainly risky, but the rewards do seem to outweigh the pitfalls.
