Shares of PepsiCo (NASDAQ:PEP) are trying to push into positive territory for the year. If it does so, Pepsi stock will have reversed nearly all the effects of the selloff prompted by the novel coronavirus. However, a quick glance at the stock chart shows that PEP has been trading pretty much sideways since April.
When I wrote about Pepsi back in June, I figured the sideways trading was nothing a strong earnings report couldn’t cure. However, after a good earnings report in July, the stock continues to trade in a tight range.
Then at the beginning of September, Pepsi stock got a little kick on news it was launching a new product. But it turned out to be just a sugar high and the stock is once again finding it hard to move higher.
Pepsi has been a revenue generating machine, but I see something to watch closely.
A Case of Mistaken Identity?
I remember the simpler days of the “cola wars.” On one side you had Coca-Cola (NYSE:KO) and on the other side you had PepsiCo. In reality, the war was never as simple as whether consumers prefer the taste of one cola over the other.
PepsiCo has not been a pure play in the soft drink arena since the 1960’s. That’s when the company bought Frito-Lay. This allowed the company to diversify into snack foods, a benefit that has been advantageous during the Covid-19 pandemic.
Plus, carbonated, sugary drinks have been under siege for years. Obesity is one of the main side effects of too much soft drink consumption. It’s one reason they’ve drawn the ire of public health officials (and some politicians) as an easy mark.
This move away from soft drinks is reflected in PepsiCo’s sales numbers. Even prior to the pandemic, the company knew it was going to have to make a pivot in the beverage space.
And pivot it has. Today, PepsiCo has a brand for any way consumers want to be refreshed. From Aquafina bottled water and Bubly sparkling water, to Tropicana orange juice and much, much more. PepsiCo considers it an evolution and it really is. In fact, this diversity of product offerings explains why Pepsi stock sells for over double the share price as that of Coke.
But it also makes its latest pivot a bit curious.
Is PepsiCo Trading One Vice for Another?
A major catalyst for Pepsi stock in the next several quarters will be its acquisition of Rockstar energy beverages. The business case is easy to understand. According to Mordor Intelligence, the market for energy drinks will be increasing at a compound annual growth rate (CAGR) of 7.63% through 2024.
When energy drinks first came on the scene, they were marketed as performance enhancers. The expansion of energy drink labels coincides with the increase in fitness centers. Now, you might think I’m going to mention that many fitness centers remain closed. And there is concern among industry analysts that many fitness centers will not survive without a relief package from the government.
But that’s not where I was going. Rather, you know and I know that this is not the primary audience for energy drinks. Energy drinks have become the No-Doz on college campuses. They have replaced soft drinks in many cases with teenagers. However, the lift that consumers get has long troubled the medical community, particularly because of links to anxiety and insomnia.
From Soft Drinks to Sleep Aids
But never fear. Now PepsiCo is getting into the sleep aid business. The company is launching a new, de-stressing and relaxation-promoting beverage, Driftwell. The zero calorie, sugar-free drink will launch in December. It will come in 7.5-ounce cans and include hints of blackberry and lavender, along with 200 milligrams of the amino acid L-theanine and 10% of the recommended daily allowance of magnesium.
This is PepsiCo’s foray into the $1 billion business of sleep remedies. The stock got a mild bump on the news, but now is falling back. And I’m not surprised.
Pepsi Stock Is Looking for Direction
I’m not suggesting that PepsiCo will abandon soft drinks. But it’s becoming really hard to understand PepsiCo’s business plan. It feels like the company wants to be the jack of all trades. And maybe that will be good enough. It is after all considered a defensive stock.
However, it would be easier to get excited about Pepsi stock if it mastered one of the areas it’s competing in. After being a brand that has encouraged consumers to indulge our vices, it’s hard to see the company’s pivot to health and wellness as anything but a cynical attempt to get us amped on energy drinks and then bring us down for a gentle night’s sleep.
Analysts seem to share my skepticism. However, the company still pays a dividend, which isn’t a terrible way to manage the volatility in the market.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019.