On social networking website Facebook, make-your-own-soda company SodaStream (NASDAQ:SODA) is one of the most popular kids on the block. With nearly 760,000 "likes," SodaStream is close to 10 times more popular than iRobot or Dyson -- two other popular "home tech" companies that boast enthusiastic consumer fan bases. But does the popularity of SodaStream's products mean you should also invest in SodaStream stock?
In a word: no. When it comes to potential investments, buying shares of SodaStream is a truly miserable idea -- and here's why.
SodaStream costs too much
SodaSteam's claim to fame is a product that makes buying two-liter bottles of Coke (NYSE:KO) or Pepsi (NYSE:PEP) at the supermarket obsolete. Instead of buying soda by the bottle -- and lugging each 4.4-pound bottle of soda home to drink it -- SodaStream lets you buy a soda-making machine, fill it, and flavor and carbonate the drink yourself at home, no supermarket-schlepping required. And with SodaStream "starter kit" machines costing as little as $69 apiece on Amazon.com, making your own soda could well turn out to be cheaper than buying bottles of Coke or Pepsi.
SodaStream stock, however, is another matter entirely -- although this is not immediately obvious.
Valued purely on the ratio of price-to-earnings, the stock doesn't look all that expensive at first glance. Indeed, relative to the 21.7 P/E of Coca-Cola or the 20.9 times valuation of PepsiCo, SodaStream's P/E of 18.7 looks pretty cheap. But looks can be deceiving.
SodaStream isn't as profitable as it looks
Valued on the "earnings" it reports on its income statement, SodaStream stock might appear cheap. But, according to data compiled by S&P Capital IQ, SodaStream's free cash flow -- the actual cash profits generated by the business -- an entirely different picture is painted. In fact, SodaStream has generated positive annual cash profits in only three years since 2008 (which is as far back as Capital IQ has data on record). And its overall record of cash profitability over the past seven years is a miserable $72.3 million in combined negative free cash flow.
Yes, you read that right. Despite reporting positive generally accepted accounting principles "profits" in six of the past seven years, despite reporting $28.1 million in positive earnings over the past year, and despite boasting what at first seems to be an attractive P/E, SodaStream as a business has actually been burning more than $10 million in free cash flow annually over the past seven years. SodaStream also burned through more than twice that amount -- $21.4 million -- over the past 12 months.
SodaStream stock: More fizz than substance
Want an even clearer depiction of the problems with SodaStream stock? (I mean, an even clearer depiction than you could get from noticing that, over the past year, SodaStream's stock price has plummeted by 60% -- which is itself a pretty good clue to the stock's merits)?
Well, here you go. An illustration depicting SodaStream's performance in terms of ""free cash flow yield" (that's the amount of cash profit the company generates for you, per dollar it costs you to buy the stock) over the past five years. To make the picture crystal clear, we'll show you Coke and Pepsi's performance on this metric as well:
As you can see, when it comes to generating real cash profits for their investors, Coke and Pepsi both do a much better job than does SodaStream. On average, for every dollar you put into Coke or Pepsi stocks, you can expect them to produce for you about $0.045 or so in profit. This is money the companies can (and do) pay out to their shareholders in the form of dividends. It's money they can use to buy back shares (increasing the size of your stake in the company for every share they take off the table). It's also money they can reinvest in their (truly profitable) businesses.
But SodaStream? Sure, some years you lose less money than others on an investment in SodaStream stock. But the general rule holds true: This company simply isn't very good at turning investor dollars into real profits.
Until that changes, there's simply never going to be a good reason to own SodaStream stock.
Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Coca-Cola, Facebook, iRobot, PepsiCo, and SodaStream. The Motley Fool owns shares of Amazon.com, Facebook, 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.