SodaStream (NASDAQ:SODA) stock has lost more than 50% of its market value during the last year, and it has a big short interest ratio of more than 35% of its float. This is clearly indicating that there's a lot of negativity surrounding SodaStream stock lately. The company is having difficulties in streamlining its business and accelerating sales growth in the U.S., and this seems to be the main reason for concern when it comes to SodaStream.
On the other hand, the business is still firing on all cylinders in international markets, and SodaStream stock could offer substantial upside potential from current levels if things turn for the better. Also, the possibility of an acquisition makes a short bet on SodaStream a particularly risky position.
Is SodaStream a short sell, or will the bears regret their pessimism as the stock pops higher during the coming months?
A tale of two markets
SodaStream is facing considerable headwinds in the U.S. The company can't seem to overcome difficulties in that region, and excess inventory from the holiday quarter remain a considerable drag on performance. While total sales increased 6.6%, to $141.2 million during the second quarter of 2014, sales in the Americas region fell by a worrisome 14%, to $40.9 million.
When looking at performance excluding the U.S., the company is doing quite well across its different products. Total sales, excluding the U.S., grew 20% year over year during the last quarter, with gas refill units increasing 20%, flavor units growing 21%, and soda maker units increasing 4%.
Performance was very different in the U.S., though. Gas refills increased 7%, but flavor sales declined 11%, and machine sales fell off a cliff, with a decline of more than 55% during the second quarter. According to CEO Daniel Birnbaum: "The softness was mainly attributable to our demand creation efforts, which were not as effective as expected, combined with the fact that most retailers are still carrying excess soda maker inventory."
Reasons for optimism
Management believes that there are some reasons to be optimistic regarding the prospects for a turnaround in the U.S during the coming months. During the earnings conference call, Birnbaum quoted data from NPD saying that sell-through rates of gas refills grew 28% in the U.S. during the last quarter, which is an indication of resilient demand as users continue putting their machines to active use.
The company acknowledges that it needs to streamline both its product and marketing strategy in the U.S. SodaStream is putting more focus on the health benefits of its products and platforms over the value proposition and cost benefits, which have traditionally been a big part of SodaStream's marketing message in the U.S.
According to management, this marketing strategy has been very effective in Europe. Considering that big soda players such as Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) are facing considerable headwinds due to stagnant or even declining demand as consumers are increasingly conscious about the health implications of soda consumption, this seems to be a smart move by SodaStream.
Big upside potential
While SodaStream's problems in the U.S. are a valid reason for concern, the company is still firing on all cylinders in international markets. If sales in the U.S., as a percentage of total revenues, continue declining over time, overall performance should improve, as a bigger share of the business will be coming from global markets. Needless to say, if management is right about the prospects for a turnaround in the U.S. during the coming quarters, growth rates should accelerate materially.
Importantly, SodaStream is trading at historically low valuation levels when looking at ratios such as forward P/E or Enterprise Value/EBITDA. This means the company's problems are incorporated into valuation ratios to a considerable degree, and the stock offers substantial upside potential if things turn for the better.
There have been plenty of rumors and news reports regarding a possible acquisition of SodaStream during the last several quarters. PepsiCo was rumored to be interested in an acquisition this summer, an idea which makes a lot of sense considering that rival Coca-Cola is entering in the home soda market via a partnership with Keurig Green Mountain.
According to The Marketer, a british private equity firm is interested in acquiring SodaStream for $40 per share, a premium of roughly 30% above current market prices. It's hard to tell if these rumors will lead to some kind of deal in the future, but the fact remains that SodaStream has the first-mover advantage in the home soda industry, which makes it an interesting candidate for an acquisition. Besides, the purchase price has become increasingly more convenient for a potential acquirer lately.
SodaStream's problems in the U.S. are a serious drawback, but the business is still doing remarkably well in international markets. The stock is priced for considerable upside if management can lead the company to a successful turnaround, and the possibility of an acquisition is a major risk for SodaStream shorts. A short position in SodaStream does not look like a great idea when considering risk versus potential for gains at current levels.
Andrés Cardenal owns shares of SodaStream. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.