Sodastream: Investment or Fad?

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Remember the good old days when you could drop a quarter into your local vending machine and enjoy a Coke and a smile?  Sadly, inflation has driven carbonated beverage prices to at least a buck, and far more in certain venues.  But Israel-based Sodastream (NASDAQ: SODA) wants to bring back the days of cheap carbonated Coke-like products, with their popular at-home fountain Soda Maker kits.  Sodastream sells an innovative line of Soda Maker Units that give consumers the ability to duplicate their favorite soft drinks, at home, for about $0.25 per drink.

Sodastream's growth has been very strong, with sales up nearly 50% year to date in 2012.  Since 2009 the company has sold over 8 million Soda Maker Units, paving the ground for future CO2 and Flavor refill sales.  Investors have been rewarded with over a 20% gain in the last year, but short-sellers have piled into the stock, betting that Sodastream's business model is unsustainable and the product is just a fad. 

Sodastream bulls hope their product will eliminate much of Coke and Pepsi grocery sales, while creating a new at-home beverage segment that will be fueled by future sales of Sodastream's  flavor and CO2 refill products.  The company's next earnings report will highlight how many new Soda Maker Units were sold during the crucial Q4 holiday period.  With retail partners including Wal-Mart and Target, along with a strong media push, analysts expect that over 1.2 million new units were sold in the quarter.  Adding to the buzz of the brand, Sodastream's first Super Bowl ad was rejected due to network allegiance to behemoths Coke and Pepsi.  The snub created positive PR for the banned ad with over 4 million Youtube views.  This positive PR and media momentum has many bulls expecting a blowout quarter and higher guidance for 2013.

Sodastream is currently valued at around $1 billion, which may seem like a lot until compared to rivals Coke ($187 billion) or Pepsi ($112 billion).  The case can be made that one--or both--beverage giants would shell out a premium to acquire Sodastream, removing the nuisance of intrusion into their high-volume grocery segments.  Coke (NYSE: KO) has over $28 billion in cash parked on their balance sheet to invest in a growth strategy such as Sodastream.  Sodastream flavors could be converted into existing Coke products, giving customers unlimited customization options at home, similar to the Coke Freestyle in quick service restaurants.   But Coke has not shown interest in making their product available to be created at home, citing inconsistency and loss of brand identity.  It seems that Coke is content to let Sodastream take grocery market share in the near-term.

PepsiCo (NYSE: PEP), on the other hand, has been rumored to be developing their own Sodastream that would control the consistency of their products for at-home use.  Whether or not the rumor is true, Pepsi must acknowledge the competition that Sodastream has brought into their marketplace.  A successful launch of a Pepsi-licensed beverage system would obviously be a major challenge to Sodastream.  But would a Pepsi Soda Maker help overall, or just cannibalize Pepsi's current grocery sales?

Improvements can be made to Sodastream's operations.  In the last earnings release, CEO Daniel Birnbaum outlined a few areas of opportunity that could create incremental income in the quarters to come. Sodastream has struggled with their distribution as recently as October 2012, when costly air freight shipments over $1 million in expense, in order to have product on shelves in time for Christmas.  Additionally, a roll out to the Mexico marketplace was "not effective" in the words of Birnbaum.  Instead of relying on a third-party distributor in Mexico, the company will dedicate long-term resources to building out this strategic geography.  As management becomes more adept and seasoned to the challenges of a growing company, they will streamline operations and improve profitability.

With over 55% of the float held short, Sodastream is a true battleground stock.  2013 looks to be the year that Sodastream will go big or go home.  Inventory was rumored to be low at the end of Q4, signaling strong holiday sales.  With strong product placement in early 2013 in Wal-Mart, units could see increase demand.  If Q4 2012 results and Q1 2013 guidance beat analyst expectations, shorts will scramble to cover, and Sodastream shares will soar to new highs.

 


houlijr8 has no position in any stocks mentioned. 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!

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