The Story Behind SodaStream's Recent Volatility

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shares of SodaStream (NASDAQ: SODA) have shown significant volatility in the past month after surging to a 52-week high and then falling over 20% to just below $60 per share. It isn't surprising at all that a high-growth small-cap stock would provide investors with this type of roller coaster ride; what is surprising is that the spike and then subsequent fall in share price wasn't actually driven by real news. Speculation that the company was about to be acquired fueled the rise in share price, while the evaporation of acquisition rumors and a recent downgrade from Oppenheimer that cites valuation and expectations for "choppy" second half results headline the recent decline.

The question for investors is, has the big picture really changed?

The investment thesis

As outlined in a series of articles that chronicles each $10 move in SodaStream's share price over the past year as it has risen to $40, $50, $60, $70, and now back to $60 per share, the investment thesis is centered around huge growth potential. The company's management expects to grow revenue to $1 billion by 2016. On the bottom line, analysts expect that SodaStream can continue to grow earnings by 25% per year over the next five years.

The growth drivers that can make this happen have not changed; increased penetration in the United States, expansion in emerging markets, new innovations in soda makers and unique products like SodaCaps, and the creation of new partnerships continue to be at the heart of the company's growth plan and remain completely unchanged with one notable exception.

Since the previous article in this series, SodaStream has further enhanced its third party partnerships with the announcement of a new partnership with Whirpool (NYSE: WHR). Through its new relationship with Whirlpool's KitchenAid brand, SodaStream has added an ally that further solidifies both the concept of home soda carbonation and the SodaStream platform. In a "razor and blade" business model like SodaStream's, finding ways to partner with household names like Whirlpool's KitchenAid and avert the development of a competing platform are critical to continuing revenue growth from syrups and gas "carbonator" refills. Steve Symington recently outlined how this agreement could be SodaStream's biggest deal yet.

The noise regarding a possible acquisition and the "potential" for a "choppy" second half had no real bearing on the investment thesis for the company. Investors should always be cautioned on purchasing shares solely in anticipation of a presently unannounced acquisition.

The valuation remains attractive

Even at its 52-week high of $77.80, shares of SodaStream were not unreasonably valued considering the company's growth prospects. As a result of the recent decline in share price, SodaStream's valuation looks very similar to how it did back in May, as noted below:

 Aug 23, 2012Feb 20, 2013May 10, 2013Jun 4, 2013Jul 14, 2013
CAPS rating (out of 5 stars) 2 stars 2 stars 3 stars 3 stars 3 stars
Share price  $39.00  $49.10  $58.79  $70.35  $59.51
Market capitalization (in millions)  $791  $1,000  $1,218  $1,431  $1,233
TTM revenues (in millions)  $345  $436  $466  $466  $466
TTM price to sales ratio  2.28  2.29  2.61  3.06  2.77
TTM operating margin 10.40% 10.10% 10.20% 10.20% 10.20%
TTM price to earnings ratio  23.74  22.80  26.58  32.27  27.30
Forward price to earnings ratio  13.88  18.81  18.37  21.85  18.25
PEG ratio (per Yahoo! Finance)  0.79  0.75  0.90  1.12  0.89
Cash on balance sheet (in millions)  $57  $63  $50  $50  $50
Debt on balance sheet (in millions)  $0  $0  $8  $8  $8

 
With no negative changes to the big picture for SodaStream, this improved valuation presents an excellent value point to acquire shares. It is a bit confusing and short-sighted that Oppenheimer would use valuation as a reason for a downgrade of a company with a PEG below 1.

Looking ahead

SodaStream will report its quarterly earnings on August 5. As usual, the earnings release will provide insight into the company's growth, profitability, and progress towards its long-term goals. Additionally, it is important to remain focused on the growth rates of the company's products, particularly the consumable syrups and gas refills, to judge the ongoing adoption and use of SodaStream systems.

Additionally, the competitive environment remains the primary risk to SodaStream's goal of more than doubling its revenue by 2016. Each partnership that SodaStream enters into helps to solidify the company's first-mover advantage and continue to widen its moat; the KitchenAid partnership is yet another example of this. Meanwhile, competition has already started to trickle into the market from kitchen appliance manufacturers such as Cuisinart. Adoption of competing platforms like Cuisnart's or development of a home beverage system from PepsiCo (NYSE: PEP), the company rumored to have been interested in purchasing SodaStream's home carbonation technology, are important to watch carefully in the coming months. While Pepsi did not buy SodaStream, it is certainly possible that the company could invest its tremendous resources in the development of a competing home carbonation platform.

Invest in what you know

Not sure whether shares of SodaStream deserve a place in your portfolio? SodaStream presents an excellent opportunity to take Peter Lynch's famous advice to "invest in what you know." Try the product for yourself! SodaStream holds free demonstrations at many of its retail outlets, and soda makers can be purchased for less than $100.

Meanwhile, the long-term investment thesis for SodaStream is completely intact. The recent decline in share price simply gives investors the opportunity to add shares at a reasonable price point. While it is certainly possible that a lower share price may be available later in the year, I firmly believe that much higher share prices await investors in the future.

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Brian Shaw owns shares of SodaStream. The Motley Fool recommends 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!

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