An Underestimated Soda Company
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Making an outperform CAPS call on Green Mountain (NASDAQ: GMCR) in March was one of my biggest mistakes. When I considered Green Mountain, I also considered another company that investors frequently compared to Green Mountain, SodaStream (NASDAQ: SODA). Other investors also noticed similarities between these companies, so when Green Mountain crashed, SodaStream fell along with it. SodaStream rallied today, suggesting that some investors have realized that these two companies aren't the same after all.
Several things went wrong with Green Mountain, but one of the most critical factors was the strength of the company's moat. Green Mountain had a patent on its K-Cups, and although analysts warned that this patent would expire soon, Green Mountain seemed like it had enough market share to ward off its competitors. Shortly after my original call, Green Mountain's partner, Starbucks, announced that it planned to work with Verismo to make its own single serve coffee brewer.
Although Starbucks announced soon afterward that it planned to keep working with Green Mountain, the damage was done. Investors now knew that Green Mountain's market was vulnerable, and its stock started falling sharply. With the K-Cup patent soon to expire, even more stores that sold Green Mountain's Keurig brewing machines announced plans to sell their own K-Cups, including major supermarket chains Safeway and Kroger.
According to Yahoo Finance, more than 70 percent of Sodastream's shares are held short right now, as bears believe that SodaStream is as vulnerable as Green Mountain was a few months ago. If the bears are wrong, SodaStream's financial figures suggest that it could trade at a much higher premium, and short covering could take SodaStream much higher very quickly.
One of the main reasons why Green Mountain's shares dropped so far, so fast, was because of accounting problems at the K-Cup maker, which made its growth figures look questionable. Accounting problems are company specific, so this is not a good reason to short SodaStream. A bigger risk is the chance that another soft company could introduce its own home soda machine. Primo's entry into the home soda machine market last year showed that a competitor could appear, so the strength of SodaStream's moat deserves consideration.
The story of Monster (NASDAQ: MNST) shows that SodaStream has a chance if a large competitor does decide to make a home soda machine. SodaStream's business model depends on sales of its flavored syrup packets and its carbon dioxide cartridges, so it can retain its customers by appealing to their specific tastes. Monster energy drinks also offer a unique taste that helps the company keep its customers. Even after Coca-Cola (NYSE: KO) introduced its Full Throttle energy drinks, Monster kept growing. Monster reported 27.5 percent revenue growth and 38.3 percent income growth in its latest quarter, even with Coca-Cola active in its market. SodaStream's 46.2 percent quarterly revenue growth and 79.3 percent income growth surpass Monster by quite a bit, but SodaStream's 13.9 forward P/E is less than half of Monster's 29.8 figure.
If SodaStream inspires as much brand loyalty as Monster, SodaStream could be able to maintain its growth even if other companies introduce their own soda machines. Moness Crespi reported that Walmart has been having trouble stocking enough SodaStream machines to meet customers' demand, according to Christine Harvey at Bloomberg, which provides some evidence of SodaStream's current popularity. The SodaStream growth story may be just getting started.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company and SodaStream. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, Monster Beverage, SodaStream, and The Coca-Cola Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.