Buying Opportunity in This Disruptive Growth Stock
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There have been strong rumors about an acquisition of SodaStream (NASDAQ: SODA) by a major soda company like Coca-Cola (NYSE: KO) and Pepsi (NYSE: PEP) over the last few months. But those rumors have been running out of steam lately, and SodaStream is down by more than 20% from its May highs due to investors' disappointment.
But the long-term fundamental story for this disruptive growth stock is still intact, so the recent pullback looks like buying opportunity.
SodaStream vs. Giants
An acquisition of SodaStream by Coke or Pepsi doesn´t sound like an unreasonable idea at all. The big soda giants have many things that SodaStream doesn´t: abundant financial resources, a gigantic global distribution network and enormously valuable brand recognition.
SodaStream spends in marketing in one year what Coca-Cola spends in only two days, yet the innovator has been outgrowing the cola giant by a wide margin. Just imagine what SodaStream could achieve if it had the money, the commercial scale and the branding power of a giant like Coke or Pepsi behind its disruptive products.
SodaStream has aggressively targeted its marketing campaigns against Coke and Pepsi, promoting itself as a health-conscious and environmentally friendly alternative to traditional soda products. Besides, SodaStream offers much lower costs and more flexibility when it comes to flavors and calories than Coke or Pepsi.
Buying SodaStream while it´s still young and affordable would not only provide interesting growth opportunities for the soda giants, it would also mean eliminating a potentially threatening competitor on a long-term basis.
On the other hand, an acquisition would clearly generate some conflicts with bottlers and distributors all over the world. There would also be some cannibalization concerns, and Soda Stream’s business model doesn´t exactly combine very well with that of Coke or Pepsi.
Regardless of the merits and risks of an acquisition, it looks like a deal won´t happen any time soon. But make no mistake, this is no reason to stay away from SodaStream. On the contrary, the recent retracement may provide a compelling opportunity to purchase this disruptive company at a convenient entry point.
Firing on All Cylinders
Like any new and disruptive company, SodaStream is quite a risky investment. But the investment case is getting stronger by the day as the company is gaining acceptance among consumers and expanding its reach via alliances with other companies.
The company has increased sales at a 47% annually since 2009, and earnings per share have been growing at a whopping 71% per year over the same period. The fact that earnings per share are growing faster than sales shows that SodaStream has been able to increase margins and avoid excessive share dilution in order to translate growing sales into higher earnings for shareholders.
Importantly, growth is not only coming from machines, but consumables like flavored syrup and carbonator refills are performing strongly too. While machine units grew at a 49% annually over the las four years, flavour unit sales have expanded at an even faster 57% per year, and carbonator refills at 24% annually.
The company operates under the razor and blade mode, it sells the machines – the razors – for a low cost and it makes most of its profitability with the consumables – the blades. The fact that customers are effectively using the machines and buying consumables is quite reassuring when it comes to measuring the company's financial prospects and acceptance among customers.
SodaStream products are available in more than 55,000 points of sale worldwide, including home & electrical appliance stores, hypermarkets, supermarkets, department stores and convenience stores among others. Some of the well known places where the products can be found include: Wal-Mart, Target, Staples, Best Buy and Office Depot among many others.
The company announced in February a deal with Samsung to integrate its machines into some of Samsung´s refrigerators. More recently, SodaStream joined forces with Whirlpool to build a new KitchenAid-branded home carbonation system which is expected to be available for sale in time for the holiday shopping season.
Consumers are validating the product, and so are other companies. This creates a positive cycle of expanding distribution network and growing brand recognition, and the company still has plenty of room for growth due to its relatively small market penetration.
Maybe there were some negotiations that didn´t go through, or perhaps the acquisition rumors were completely unfounded to begin with. Regardless of that, SodaStream is an innovative and disruptive company with extraordinary growth prospects, so the recent pullback should be seen as a buying opportunity in the company.
If you're looking for some long-term investing ideas, you're invited to check out The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.
Andrés Cardenal owns shares of SodaStream. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!