SodaStream Will Not Lose its Fizz

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) is a relatively new company in the U.S. beverage industry, with PepsiCo (NYSE: PEP) and The Coca-Cola Company (NYSE: KO) being two of the dominant forces in this particular industry for decades. SodaStream, after its success in the European markets, is one of the hottest companies in the stock market, as it has a lot of growth potential. 

The company operates under a razor-blade model, and its primary product is a soda maker which lets consumers create their own carbonated beverages. Possibly, one of the biggest advantages for the company is that its products are eco-friendly. Not only does this prevent consumers from throwing thousands of cans and bottles everyday, but the sodas are healthier compared to other bottled sodas in the market. Sodas made using the SodaStream syrups have less calories, sugar and carbs.

Valuation

With a market capital of around $1 billion, SodaStream is currently trading between $45 to $55. PepsiCo and Coca-Cola are currently trading between $75 to $77 and $35 to $40 respectively, with PepsiCo being overvalued compared to its growth opportunities. SodaStream, on the other hand, is undervalued compared to its growth rates and future growth potential. The latest quarter for SodaStream saw a revenue growth of around 55%. Net income increased nearly 60% compared to the same quarter in 2011.

SodaStream's revenue of $132.9 million outperformed Wall Street estimates of around $121 million. EPS also rose 56% to $2.09 per share. The reason why SodaStream is not appealing to some investors is that the company doesn't pay cash dividends. PepsiCo and Coke, on the other hand, have a reputation of paying cash dividends, and have dividend yields of 2.8% and 2.9%, respectively.

While the 2 companies have been paying dividends, they have been quite shaky in terms of capital gain. We all know that paying dividends is not always a good thing, and if SodaStream continues to grow in this fashion, then it would be an ideal opportunity for patient investors in terms of a long-term capital gain.

Another highlight from the latest earnings report was a 96% growth in revenue from the American side of the business. Over 47% of the company's total revenue came from sales in the U.S. This means that nearly half of the company's revenue comes from the U.S., which is the largest soda industry in the world. 

Over a million Soda machines were sold in the U.S. This doesn't only mean that the company generated enough revenue from the country, but this also means that people will continue to buy syrups and C02 Canisters, which would maintain a steady stream of revenue for the company in the coming years. Selling these "razors" would also help the company to match PepsiCo and Coca-Cola's steady revenue of soda cans and bottles.

The reason why this is such a crucial point is because SodaStream's growth lies on its performance in the U.S. market. Previously, people claimed that it was a fad; however, SodaStream continues to grow in the U.S market. If the numbers keep on growing, SodaStream is set to shine in the U.S., like it did in the European market. After sales of 1 million soda makers in the U.S., the company claimed that sales exceeded expectations and that the company has high hopes in this huge soda market. PepsiCo and Coca-Cola are still dominating this huge market, with very few competitors. SodaStream now has a chance to become the third dominant force in the U.S soda market.

Competition

SodaStream's two major competitors are PepsiCo and Coke, which are the only giants in the soda industry. Coca-Cola can be regarded as a direct competitor to SodaStream, as most of its revenue comes from its soda business. PepsiCo, on the other hand, generates most of its revenue from other product lines, including Frito-Lay, and not from its carbonated beverages.

The reason why SodaStream is getting so popular amongst soda drinkers is because the product is eco-friendly and produces healthier sodas. Purchasing the soda maker is a one time thing, and the company generates a steady revenue from the sales of canisters and flavorings.

PepsiCo and Coca-Cola products are available at almost all retail outlets, while SodaStream products were previously available only at few retail stores. Distribution is one of the things which could have affected SodaStream's market in the U.S., as previously, the company didn't have many distributors, especially for the canisters and syrups. However, the soda makers and the canisters are available at most retail outlets and giant stores, including Bed Bath & Beyond and Wal-Mart.

Future growth and things to be optimistic about

SodaStream recently announced a partnership deal with Ocean Sprays Cranberries. Ocean Sprays is one of the leading names in cranberry beverages and foods. The new partnership will bring Ocean Spray's popular flavors to SodaStream's portfolio of various different syrups, including diet cranberry and cranberry-raspberry.

More than 30% of the Ocean Sprays customers prefer sparkling water in the cranberry juice, and the new partnership is the perfect opportunity for consumers to enjoy the classic cranberry juices along with SodaStream's sparkling water. The new flavorings will hit stores later this year and this is definitely something to be optimistic about in the future.

Another headline is SodaStream's partnership with electronic giant Samsung. Both the companies, together, have released a new refrigerator which will dispense filtered sparkling water. This is a whole new step for SodaStream after its successful soda maker. The fridge will feature 3 different levels of fizziness, and will use SodaStream's replaceable C02 canisters. The fridge will be available from next month in North America for under $4000. 

Conclusion

SodaStream is a new type of company in the soda industry in the U.S. and many believed that the company would not be able to create a similar impact that it had on the European market. Since its entry into the U.S. market, the company has been growing with the U.S. being its strongest market.

Yes, the company doesn't pay dividends but this doesn't mean that it is not a good long term opportunity for investors. If the company can grow in similar fashion for the next couple of years, then it would give a capital gain dreamt by PepsiCo and Coke investors. With its new strategic partnerships to grow even further, there is no doubt that SodaStream is an ideal opportunity for long-term investors.


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!

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