Shares of SodaStream (SODA) have plunged nearly 30% over the past three months as investors began questioning whether consumers’ interest in the company’s soda-making machines has faded.
Like Coca-Cola (KO) and PepsiCo (PEP), SodaStream faces the huge challenge of getting increasingly health-conscious consumers to buy carbonated beverages, a product with little-to-no nutritional value. Per capita-soda consumption has been declining for more than two decades, and barring some sort of miracle, won’t ever rebound to previous levels.
SODA Stock Not So Sweet for Wall Street
Both Coca-Cola and Pepsi have tried for years to bolster sales and have failed miserably because public health activists have linked soda consumption, somewhat unfairly, to obesity and other health concerns.
Evidence abounds that the SodaStream fad is fading. The fourth quarter was particularly worrisome for SODA stock. SodaStream reported worse-than-expected earnings and gave lackluster guidance as the company’s gross margins plunged to 42.4% to 53%.
Even though SodaStream slashed prices 10% below its plans, it still couldn’t move its product. The results cooled Wall Street’s optimism with SodaStream. Barclay’s analyst David Kaplan, for one, cut his rating on the stock yesterday down to “equal-weight” from “over-weight,” and he slashed his price target to $40 from $55 — right around current prices for SODA stock.
As Kaplan argues:
“The key challenge for SODA in our view is the company’s ability to increase its penetration rate without impacting its margins. The company will have to carefully monitor its advertising budget as well as its pricing policy in order to maintain healthy margins.”
Of course, that’s easier said than done, and SODA stock faces a slew of challenges, going forward.
Coffee Is Still King
For one thing, consumers still value coffee more than soda. Though there are people who pound carbonated beverages like they are going out of style, they are in the minority. More consumers appreciate a quality cup of coffee than a “hand-crafted” soda. Coke and Pepsi taste the same in Texas as they do any other place in the country, and the soda costs about the same, too. Market research bears this out.
American workers spend about $1,092 on coffee annually. Young people spend roughly $10 more than their older counterparts. Spending on soda works out to about $850 per household every year. It may not seem like much, but that’s a huge difference.
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.