Is This The Time To Buy SODA?
Yasir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
SodaStream (NASDAQ: SODA) has, again, gained a lot of attention after CBS banned its Super Bowl ad campaign. According to CBS, the company's ad was directly attacking two of the biggest names in the soft-drink industry, Pepsi (NYSE: PEP) and Coca-Cola (NYSE: KO). SodaStream does have a backup ad campaign, and will look for another big opportunity to air its original ad. In the meantime, competition between the three companies is as fierce as ever, and investors scanning the soda space are watching closely to see which of these soft-drink players provides the best opportunity.
Why SodaStream is a Good Buy
For decades, SodaStream has been successful in Europe, with Sweden being one of its strongest markets. Since its entry into the U.S market, its numbers have been looking good, with different opinions on whether the stock is a buy or a sell.
One of the product's major selling points is its eco-friendliness. SodaStream lets users make their own sparkling water and soda, directly from tap water. This "razor and blades" model has gained a lot of popularity in Europe, as the company sells both soda makers and syrups or flavorings. Instead of buying cans and bottles regularly, users need the soda maker, which includes a reusable bottle for carbonated drinks.
Research shows that more than 60% of people like to go for environmentally friendly products. That suggests that SodaStream can be a huge success, since sodas are a part of most people's daily lives. Pepsi and Coca-Cola have dominated the global soda market for decades with a variety of different products; however, their customers throw out thousands of cans and bottles every day.
Secondly, sodas created using the SodaStream machine are more nutritious, since they have less sugar and fewer calories. A lot of people might not be aware of this, but once the company's ad campaign goes live, a lot of people might think about switching to personal soda makers.
Another reason to buy SodaStream stock instead of buying Pepsi or Coke is that SodaStream's shares look extremely cheap compared to their growth potential. The last earnings report showed that the company's revenue increased by nearly 50%, and earnings per share rose by 66.7%. Pepsi and Coke both trade at or near their true valuations, and their expected future growth looks weak, with Coke doing slightly better than Pepsi.
SodaStream doesn't only earn money from the sales of its soda makers; it also maintains revenue from sales of CO2 canisters and syrups. This helps SodaStream maintain a high gross margin, close to Pepsi and Coke.
Things to Look Out For
One of the reasons why a lot of investors feel that SodaStream is not worth investing in is that it might be a fad, and things in the U.S. might not turn out as well as they have in Europe. The sales of the CO2 canisters and syrups will be an important factor to determine whether people are using their soda makers. Pepsi and Coke have been around for decades in the market, and there is no doubt that a lot of people will continue to buy canned and bottled sodas.
When SodaStream first came to the U.S, Wal-Mart wasn't a distributor of the product, even though sales have since exceeded expectations at Walmart and Bed, Bath & Beyond. However, the thing to look out for here is the availability of CO2 canisters, which could be one of the major factors deciding SodaStream's future.
The company is targeting various retail outlets and stores, but the canisters aren't available everywhere. You can find Pepsi and Coca Cola sodas just about anywhere, all around the world, but this isn't the case with SodaStream. Research shows that if it takes more than a 15-minute trip for people to go and buy these canisters, those shoppers will turn back toward Pepsi and Coke.
If you are thinking of investing in the industry, then SodaStream looks really promising. Pepsi and Coke have been stable stocks, while SodaStream is going through a crazy ride. The growth opportunities for SodaStream are numerous, and another earnings report is due late February. It's expected to show further improvement; sales have been brilliant during the holiday season, and thousands of products have been sold at various retail outlets.
SodaStream might turn out even better by the end of 2013. However, things might change, and the company could face serious bumps along the way. In the case of Pepsi and Coke, you can buy the stock and wait. However, in the case of SodaStream, you'll want to closely monitor any investment you make.
yasirrfc 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!