Will This Soda Company Pop or Fizzle?

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Many people have heard the name SodaStream (NASDAQ: SODA), but not many people know the details. The primary reason for this is that SodaSteam is an Israeli company that has penetrated much of Europe, but not much of the United States. That being the case, growth potential is still high. Considering the short position on SodaStream is 38.40%, there are risks, but are those risks overplayed? 

What is SodaStream?

SodaStream sells at-home beverage carbonation systems. Its products can be found in 60,000 retail stores in 45 countries. Revenue and earnings have consistently improved on an annual basis. The last quarter saw a 33.90% year-over-year revenue increase, and a 19.50% year over year earnings increase. What makes SodaStream so attractive to consumers? How has this growth been possible?

The two biggest selling points for SodaStream are convenience and savings.

Since these are at-home carbonation systems, there is no need to purchase soda at the store. Therefore, lugging a case of soda from the store to the parking lot and then into the house isn’t necessary. Not having to purchase cases of soda also frees up storage space at home. Yet another convenience is that it takes less than 30 seconds to turn water into soda.

According to SodaStream, customers also rack up savings. Apparently, it costs $0.25 per can of soda or liter of sparkling water. Some customers will debate these numbers night and day, but the majority of customers agree that money is being saved.

The prices for SodaStream Soda Makers differ slightly from one retailer to another. At Amazon.com, prices range from $79.95 for the Fountain Jet to $199.95 for the Revolution. Based on the majority of Amazon.com customer reviews, SodaStream products are a good investment. If the overall reviews continue to impress, then SodaStream has strong growth potential. 

Can SodaStream outperform Coke and Pepsi over the long haul?

You might have a chance at stealing Angelina Jolie from Brad Pitt, but it's not likely. Same goes for the question above.

Coca-Cola (NYSE: KO) and Pepsi (NYSE: PEP) are two of the top-performing stocks over the past 30 years. Please take a moment to let that sink in. Coca-Cola is the most recognizable brand in the world, and Pepsi's product diversification with sparkling beverages and snacks has led to long-term growth and stability. 

The chart below shows the stock performances for all three companies over the past year. 

<img alt="" src="http://media.ycharts.com/charts/0f13827526bc698485ce0127fb95d6fa.png" />

SODA data by YCharts

This chart might make it tempting to choose SodaStream versus its more established peers. However, what about valuation? 

<img alt="" src="http://media.ycharts.com/charts/1068374a0dc2d2e996f35873fb6c5ebf.png" />

SODA PE Ratio TTM data by YCharts

You're paying a premium for SodaStream. The good news: SodaStream has the potential to meet or exceed its current expectations. Also, unlike most growth companies, SodaStream isn't using a ton of debt to fuel its growth. It has an impressive debt-to-equity ratio of 0.03 versus an industry average of 0.60.

Analysts and rumors

In early June, an Israeli newspaper ran a story suggesting that was interested in acquiring SodaStream. Pepsi quickly denied the rumor. However, if we look a little closer to the situation, it would make sense for Pepsi or Coca-Cola to acquire SodaStream.  

SodaStream has seen excellent growth, and its expanding its partnerships. For example, Samsung now has two refrigerators with SodaStream units embedded in them, and SodaStream inked a deal with KitchenAid, a subsidiary of Whirlpool. The former will increase visibility and word of mouth, and the latter will solidify SodaStream as the market leader in home soda.

These deals help aid SodaStream's current momentum and make SodaStream more of a long-term threat to Pepsi and Coke. Many analysts suggest that an appliance manufacturer is a more likely acquirer of SodaStream. That might be the case, but that wouldn't help Pepsi or Coke. In other words, SodaStream isn’t a threat to an appliance manufacturer. An acquisition would be affordable for Pepsi or Coke, and it would act as a defensive play with upside potential.

Conclusion

If you're looking for safety while also collecting dividends, then Coca-Cola and Pepsi are better options. Still, SodaStream has a lot going for it, and the growth potential is excellent. Its short position is likely high because SodaStream is trading at a lofty 33 times earnings. If the broader market suffers a steep correction, investors and traders will quickly exit high-growth yet expensive positions like this one.

However, as long as the broader market remains afloat (or better), SodaStream is likely to remain a winner.  

SodaStream's carbonation technology sounds simple, but this razor-and-blade company offers an intriguing opportunity for growth that could very well disrupt the soda industry. The Motley Fool's premium report on SodaStream explains the opportunities as well as the risks in the company. The report comes with a year’s worth of updates, so just click here to get started.


Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of Amazon.com, 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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