Ever since Coca-Cola announced an alliance with Green Mountain Coffee Roasters (GMCR) and agreed to buy a 10% stake for $1.25 billion, there has been speculation that SODA might join forces with rival PEP. But the case for such a move isn’t a slam dunk. Coca-Cola’s partnership with GMCR is a sign of desperation on the part of KO stock, which has barely budged over the past year. KO has underperforming PepsiCo, which gained about 5% during the same time.
Also, if PepsiCo wanted to make a foray into home beverage making, it has the option to partner with Cuisinart or another SodaStream competitor. Finally, as the web site Global Exchange notes, SodaStream is a luxury item:
“The simplest alternative to buying a SodaStream machine is to drink plain water or other non-carbonated beverages — no one actually needs to drink bubbly water. And even if you like to do so on occasion, remember that you’ll have to consume quite a bit before you’ll realize any economic or environmental benefits from owning your own machine, compared to simply buying bottles at the grocery store.”
Some Good News for SODA Stock
However, SODA stock is expanding its horizons, as Sunny Delight recently partnered with the company. Perhaps other non-carbonated beverages or sports drinks will follow suit. But again, the purpose of SodaStream eludes me. There are legions of coffee snobs, but the number of people who crave hand-crafed soda seems to be significantly lower.
SODA stock is certainly cheap, trading at a multiple of about 17, which is a discount to PEP, KO and GMCR. SODA stock is 18 percent cheaper than its average 52-week target of $46.50. Unfortunately, the reason why SODA shares are cheap is that SodaStream is a fad that’s coming to an end … albeit at a slow rate.
Perhaps the company might whet the whistle of a private equity player, as its growth remains solid. Revenue for SODA stock increased 29% to $562.7 million in 2013. Analysts are forecasting a 13.4% gain this year.
The Bottom Line
SODA stock doesn’t stand much a chance once the GMCR-KO alliance gets going. At current prices, Sodastream has a market capitalization of about $816 million, well under Green Mountain’s $16.3 billion market value. In other words, SODA stock will need a sugar daddy. Fortunately, the odds are strong that it will attract a buyer even if PepsiCo decides to take a pass.
For investors with a large appetite for risk, SODA stock might be worth a gamble. However, the company’s sales could just as easily go into a free-fall in the coming years as competition intensifies. So if you do decide to invest in SODA stock, get ready for a bumpy ride.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.