SodaStream International Ltd. (NASDAQ:SODA) surged by double digits in early trading today, in large part because of a planned home beer system. According to the official news release, The Beer Bar from SodaStream will make “quality home-crafted beer using sparkling water and a unique beer concentrate brewed to perfection.”
SODA stock popped big time on the news. And strangely, the surge wasn’t just a big short squeeze as judging by the recent short-interest reading in SodaStream stock as of May 13; as of a few weeks ago, there were only about 2.4 million shares held short — the lowest raw number of short interest in over a year and down significantly from almost 4.1 million shares held short last December.
The pop today puts SODA stock up over 50% from the end of April, so many investors are insisting that this beverage company is back.
However, shares are looking a bit bubbly if you ask me, with a forward price-to-earnings ratio that is now hovering around 20 and revenue growth that was projected to be in the mid-single-digits both this year and next before the launch.
Here’s why the Beer Bar launch from SodaStream may not be enough:
High Expectations: The Beer Bar system has to deliver big-time to connect with consumers and investors in a way that justifies the recent run-up in valuation. Sure, the P/E is not as crazy as a tech start-up’s. But this is a glorified kitchen gadget company … do you really expect SODA stock to be valued like a “disruptor” in cybersecurity or cloud computing?
Kitchen Fads Aren’t Sustainable: Also, remember, as we saw with SodaStream already and with peer Keurig Green Mountain Inc., kitchen gadgets can deliver big in the short term … but eventually fade away as tastes change and after market saturation occurs.
Limited Release: The system will launch in Europe first, available right now only in Germany and Switzerland. Other markets will launch across the next two years or so, but it’s not like we can expect an immediate pop in fundamentals simply because of distribution bottlenecks.
Not a Good Niche: I’m convinced those folks who like quality beer will continue to patronize microbrews or even make their own rather than use SodaStream cartridges. And as we have seen with soda crafting, it’s not exactly a huge money saver to make beverages this way instead of simply shopping the bargain aisle at your local supermarket. So who is the consumer? Cheapskate beer drinkers who prefer Budweiser from Anheuser Busch Inbev SA (ADR) (NYSE:BUD) and Molson Coors Brewing Company (NYSE:TAP) … or hipsters who don’t mind paying top dollar for unique and rare microbrews from manufacturers like the Craft Brew Alliance Inc (NASDAQ:BREW)? Either way, SodaStream is in between niches with its Beer Bar.
Keep in mind that SODA stock is still down about 70% from its 2013 peak, and momentum stocks like this are a lot of fun when they run up … but very painful when they run out of gas. We saw this both in 2011 when the party ended for SodaStream stock, and more recently when shares flopped from over $70 to a low under $12 earlier this year.
If you’re interested in swing-trading the Beer Bar news, then feel free. It’s undeniable that SODA stock was oversold in January and has made a great recovery for bold investors who bought that bottom.
However, SodaStream stock is looking a bit frothy right now if you ask me. I would tread very carefully before you trust this rally to continue for much longer.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
