The worst of SodaStream International's (NASDAQ:SODA) evisceration looks like it's over. Although the beverage maker's stock remains some 45% below the 52-week highs it hit last fall, it's also some 30% above the low point it sunk to in March following yet another disastrous quarterly earnings report.
Even if there are some very good reasons SodaStream should be able to keep on climbing higher from here, it remains a very tenuous situation, and here are three good reasons its stock might fall further still.
1. Water really is a saturated market.
The change from a do-it-yourself soda company to a sparkling water provider is a change in business rife with challenges. While soda consumption volumes are plunging, a case hasn't been made that helping people make carbonated water at home is much of a growth industry. Despite CO2 cartridges being SodaStream's biggest seller, it's really bottled water that's the exciting opportunity, a market the beverage maker isn't entering.
According to the International Bottled Water Association, bottled water consumption grew to 34 gallons per person in the U.S. last year, a 7% increase over 2013. In comparison, SodaStream's CO2 canisters grew just 4% in the first quarter, down from 17% in the fourth quarter, and well below the 22% growth achieved in the year-ago period. They were up 16% for all of 2014, suggesting a major slowdown is occurring.
While SodaStream achieved 6 million canister refill sales for the first time ever in the quarter, which convinces management there's still a viable business opportunity, the impact from the change in business model could result in it never recording the same kind of growth investors became accustomed to.
2. The competition gets cold beverages right.
While SodaStream employees were probably high-fiving the seemingly botched rollout of Keurig Green Mountain's (UNKNOWN:GMCR.DL) new cold beverage machine -- everything from a delayed debut on retail shelves to a very high price point -- there's still the chance its rival read the market right, and sales take off.
But even if they didn't, they're correctable mistakes, as prices can be lowered, subsidies extended, and tapping into its existing retail distribution network ratcheted up. The coffee maker's partner, Coca-Cola (NYSE:KO), is a veritable powerhouse when it comes to getting product onto store shelves.
Because SodaStream International's own new products won't be hitting the market till later this year, it only has a very small window of opportunity to make a splash, and it has to time it perfectly. Any hiccups could set it back, and its biggest, newest competitor could steal away its share.
3. Those new products fail to catch on.
A good part of the dramatic fall off in SodaStream's sales on everything from flavors to new units was due to its lack of spending any money on marketing as it awaits its new product introductions (it's also the reason it was able to report a profit in the U.S. last quarter). But new flavors are expected by the third quarter, and its new flagship sparkling water machines won't be in all major markets till the end of the year. In the meantime, retailers are left selling down their existing inventory.
That might open up shelf space for the new units, but there's no guarantee they will catch on. Like Keurig saw when it introduced its Keurig 2.0 coffee machine and consumer reception to the new appliance fall flat, there are many variables and risks facing SodaStream as it counts on its new units to restore health to its business.
Although I rather like its new adult beverage machine, the Mix (certainly more so than I'm enamored with its change to a fizzy water company), even these robotic bartenders appear to be a limited-market opportunity. Just how many people will opt for a machine to mix their drinks for them when they can easily do it themselves?
What it means for investors
After being counted down and out earlier this year, SodaStream International showed great tenacity in being able to bounce back. Now it's more of a waiting game. Investors have to bide their time till all the new products to come to market to see if consumers respond in the way management envisions.
Meanwhile, investors will probably find SodaStream's stock trading sideways until then, but watch as it burns through its cash. Although it has often recorded GAAP profits, its free cash flow, or the money the beverage maker has left over after paying for capital expenditures on buildings or equipment, has been negative. Businesses can only go so long running a deficit like that, and Soda Stream has been doing so for years.
Coupled with the risks to its business model, it's hard to recommend SodaStream International's stock, even at these depressed levels. Until it proves it can make the change in direction work, this company leaves me feeling flat.
Follow Rich Duprey's coverage of all the most important news and developments in the leading brand-name products you use. He has no position in any stocks mentioned. The Motley Fool recommends Apple, Coca-Cola, Keurig Green Mountain, and SodaStream. The Motley Fool owns shares of Apple 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.