Sodastream International Ltd (NASDAQ:SODA) has been an absolute beast. SODA stock is up 75% over the past year and 16.7% so far this year. The company’s top- and bottom-line earnings beat propelled shares higher by another 4.85% to new all-times highs on Wednesday. Yet somehow, the stock’s not as overvalued as one might think.
Let’s see what’s going on.
Fiscal fourth quarter earnings of $1.13 per share came in 33 cents per share ahead of analysts’ expectations. That’s a whopping 41% ahead of analysts’ expectations!
Revenue was impressive too, growing 19.6%. Sales of $157.66 million came in $6.1 million or almost 4% ahead of estimates. Impressively, operating income outpaced revenue growth, climbing more than 36% year-over-year. That means margins improved, too.
It gets better, though. For the full year, operating income grew 49.4% to a record $81.4 million. Net income grew even more at 67.3% also to a record $74.4 million. Even better? The company doesn’t carry any long-term debt.
Where was my eye though? Cash flow! Operating cash flow (OCF) at SODA jumped 63% in the fourth quarter to $25.5 million. Full-year OCF climbed 67.2% to $74.4 million.
When companies, particularly younger and/or smaller companies, swing from negative cash flow to positive cash flow, that’s very good news. Wall Street loves that, and investors subsequently pile into the name.
Square Inc (NYSE:SQ) and Box Inc (NYSE:BOX) are two similar examples. Both were smaller companies, but once they started churning out positive OCF and free cash flow, their stocks went dramatically higher.
A Deeper Look at SODA Stock
Looking to 2018, analysts expect SodaStream to grow revenue 10.5% to about $593.6 million. Earnings are forecast to swell another 12% this year to $3.33 per share. The company has now strung together 10 straight earnings beats, so perhaps current estimates for 2018 will prove to be conservative.
While this growth is good, it’s not necessarily great. It’s solid, don’t get me wrong. But trading at 24.5 times 2018 estimates isn’t cheap. Nor is 3.5 times trailing sales or an EV/EBITDA multiple of 16.5. There’s just no way around it: SODA’s valuation isn’t cheap.
But you know what? Neither is SQ or BOX. But so long as SODA’s business continues in the right direction, so too should its stock price. Are these names volatile? You bet. But investors are in these for the multi-bagger moves.
That’s why when SQ went from $10 to $40, so many investors were willing to stay long. It was far from cheap, but the long-term holders knew they had a stake in a great company at an excellent cost basis.
The same could now be said for SODA stock. After falling to sub-$20 prices in 2015, shares have been on a hot run. Now standing around $83, many long-term investors could be holding onto 200%, 300% or 400% gains. Perhaps even more. Even though shares carry a high valuation, they know business is going well, and they’re willing to hold on for the ride.
Trading SodaStream Stock
In 2013, SODA stock made a devastating double-top near $75. Shares quickly cascaded lower, falling to $30, which had been multiyear support. Once this gave way, it was clear SodaStream stock was locked into a violent downtrend (purple line on the chart).
However, in 2016 a powerful move through $15 broke SODA stock free from this trend. While many investors still doubted SodaStream at the time, the stock had different plans. So what now?
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Importantly, SODA stock was recently able to push through $75. Now at $83, I can see why investors wouldn’t want to chase it. Although it’s not pictured in this chart — which is a weekly eight-year view — the 50-day moving average has been a great level to buy at over the past year.
That’s where I would try to buy SODA stock. That moving average is currently near $73.50, but trending higher. Until this trend breaks, there’s no reason to bet against SodaStream stock. The ultimate buy? If SODA stock pulls back to $75-ish where its old resistance once sat and hits the 50-day moving average. That would be a very low-risk trade.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a long position in BOX.
