Investors woke up Monday morning to a major M&A headline. Beverage and snack giant Pepsi (NYSE:PEP) agreed to buy at-home sparkling water company SodaStream (NASDAQ:SODA) for $3.2 billion, or $144 per share — a 32% premium to SODA stock’s 30-day volume weighted average price.
On Pepsi’s side, the deal gives the company a new way to reach consumers within their home (SodaStream sells at-home sparkling water makers), and thus expand reach beyond retail. It is a good deal that should boost Pepsi’s long-term growth trajectory.
But on SodaStream’s side, the deal is much more interesting. It is the culmination of a two year-plus rebound that has seen SODA stock go from basically $10 in early 2016 to over $140 today.
How did SodaStream do it? And, more importantly, what down-and-out stock could bounce back like SODA stock over the next several years?
Here’s a deeper look.
SodaStream Went Healthy & Everything Changed
SodaStream went public in November 2011 at $20 per share.
At that time, SodaStream was all about allowing consumers to make sodas at home. The sparkling water maker was simply a conduit to making at-home sodas with different flavors. The strategy was working. Revenue growth was consistently hovering in the 30% to 50% range and it seemed like SodaStream was pioneering a new era of at-home soda-making.
But, then, 2014 happened. U.S. market demand went soft for multiple reasons. The biggest were price (at-home soda making machines just got too expensive) and health (consumers were shifting away from sodas in an attempt to live healthier lifestyles). Thanks to those headwinds, SodaStream sales dropped 10% in 2014 and SODA stock went from $50 to $20.
Fiscal 2015 wasn’t much better. Those same headwinds persisted, and U.S. market demand only got softer. Sales dropped nearly 20% and SODA stock went from $20 to $12 in early 2016.
During this downdraft, SodaStream saw the writing on the wall. The at-home soda-making business was a flop, mostly due to soft consumer demand for sodas in general. But at-home soda making was a two-step process, and the first step in the process was simply carbonating water. As it turned out, sparkling water was actually one of the categories that was winning share at the expense of sodas during this time.
So, in late 2014, SodaStream pivoted towards being an at-home sparkling water company, versus an at-home soda company. This pivot into healthy drinks changed everything. By 2016, demand for SodaStream machines was back, mostly thanks to the their ability to make carbonated water at a low cost and without having to use plastic bottles.
Sales rose 15% in 2016. SODA stock jumped from $12 to $40. The momentum continued in 2017. Sales rose roughly 15% again, and SODA stock soared to $70. That momentum accelerated in 2018, with sales up roughly 30% year-to-date and SODA stock at $130 pre-buyout announcement.
These Companies Could Rebound Like SodaStream
The moral of the story from SODA stock is really great things can arise out of really unfortunate circumstances. SodaStream went from dying at-home soda maker, to red-hot sparkling water company — and SODA stock went from $10 to $140 in the process.
Who is next? Who can replicate the SODA stock rebound?
Tough to say. But, one lesson to be learned from SodaStream’s story is that a pivot to healthy can dramatically improve operations. In saying that, I think of companies like McDonald’s (NYSE:MCD) which are refreshing their menus to be healthier, all while maintaining low prices. In light of what the healthy pivot did for SodaStream, I am fairly bullish on McDonald’s recent healthy pivot.
The SODA stock rebound also speaks favorably for Fitbit (NYSE:FIT) and Pandora (NYSE:P), two companies that are trying to pivot away from dying businesses and into growing businesses (Fitbit is going from wearables to smartwatches, and Pandora is going from free radio to paid, on-demand streaming). I’m less bullish on those two companies, but SODA stock serves as a strong precedent for what could happen if those turnarounds gain traction.
Above all else, I think the SODA stock rebound teaches a lesson. The lesson is that operational pivots, if done correctly, can yield hugely positive results in a long-term window, even for the most beaten-up stocks.
Bottom Line on SODA Stock
This company is truly one of the best rebound stories Wall Street has ever seen. A little over two years ago, this was a left-for-dead stock trading just above $10. Now, the company is being acquired by Pepsi at $140 per share.
Hats off to SodaStream. And, for the rest of us, let this be a reminder that sometimes tomorrow’s biggest winners can be found by looking through yesterday’s dumpster.
As of this writing, Luke Lango was long MCD.