Source: SodaStream

SodaStream (NASDAQ:SODA) stock has lost more than 60% of its value over the last year. The company is struggling to attract consumers, and both sales and earnings are moving in the wrong direction. On the other hand, upside potential could be truly explosive if SodaStream can get back on track and improve performance. Let's take a look at SodaStream stock and the chances for a sustained turnaround in 2015 and beyond.

Losing fizz
After seven consecutive years of double-digit revenue growth, SodaStream sales started flattening out and then declining over the last several quarters. Performance was initially discouraging in the U.S., and weakness has now extended to other markets such as Europe, a major geography for SodaStream.

Total sales during the quarter ended in September declined 13%, to $125.9 million versus $144.6 million in the third quarter of 2013, according to S&P Capital IQ. Profit margins are contracting, and operating income decreased to $8.9 million, or 7.1% of revenue, compared to $18.0 million, or 12.5% of revenue, in the year-ago quarter, according to the same source.

For the full year 2014 management is expecting revenue to decline 9% and EBITDA to fall 26% compared 2013 levels. The company has only $35.8 million in bank debt versus $39.9 million in cash and equivalents on its balance sheet, so the situation is not critical from a financial point of view. However, the trend is clearly not very encouraging either.

One particularly worrisome trend when it comes to revenues is the fact that growth has now also slowed in Europe, a big market for SodaStream, which was compensating for weakness in the U.S. during previous quarters. Revenues in Western Europe declined 1% during the last quarter, much better than the 40% decline in the Americas region, but hardly something to write home about. SodaStream produces almost 60% of sales from this region, so performance in Western Europe is a key variable to watch.

According to management, weakness in Europe was concentrated in countries operated by distributors, such as France and the Czech Republic. Management says that performance in company-operated markets like Germany and Switzerland was much better, so maybe there is significant room for improvement if SodaStream can streamline its distribution process. Still, stagnant sales in Europe are clearly bad news when it comes to evaluating SodaStream and its chances of a sustained turnaround.

Can SodaStream get back on track?
Management is working on multiple areas to jump-start growth. The company plans to transform its internal organization, operations, and distribution systems. Importantly, SodaStream will be changing its focus from home soda to carbonated water, and management believes investors in SodaStream will substantially benefit from this new strategy.

The soda industry is facing massive headwinds as consumers around the world are increasingly conscious about the damaging health impact of traditional soda consumption. This is hurting big players such as Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP), and it's also being reflected in SodaStream's financial performance.

SodaStream's soda maker unit sales fell 32% in the last quarter and flavor unit sales declined 8%, however, carbonator sales increased 10% during the period. Consumers are not buying starter kits, and they don't seem to be drinking a lot of sodas either, but carbonated water is clearly doing much better.

SodaStream is changing its slogan from "Set the Bubbles Free" to "Water Made Exciting," and the company has recently published a study showing how owning a SodaStream machine can increase the consumption of water and water-based drinks versus sodas and other sugary drinks. The main idea is that SodaStream makes drinking water easier and more enjoyable, which has positive health implications for consumers.

Regarding sodas, SodaStream and PepsiCo are testing PepsiCo flavors for use in SodaStream machines. PepsiCo's rival, Coca-Cola, has partnered with Keurig Green Mountain (UNKNOWN:GMCR.DL) via a $2 billion investment positioning Coca-Cola to enter the home-soda category in 2015, so an alliance with SodaStream makes sense for PepsiCo from a competitive standpoint.

If SodaStream can in fact bring PepsiCo to its platform, it would gain a valuable endorsement from a global industry titan, which would be a considerable plus for the company when it comes to brand recognition. Also, while the alliance between Coca-Cola and Keurig Green Mountain will be a major competitive risk for SodaStream, it should also provide validation and increased consumer attention toward the home soda category.

An increased focus on water and a possible alliance with PepsiCo could be material positive drivers SodaStream needs to rebound, but the company will need more proof to convince investors. For now, perhaps the best thing to do is wait for signs of improvement before committing fresh money to a position in the stock. One thing looks clear, though, the stock offers substantial room for gains if the company can reverse the declining sales trend and deflect the negative attention with positive growth opportunities.