Is There a Protective Moat Around SodaStream?

Growth investors have run up shares of SodaStream (SODA) some 80% in a year as Americans buzzed about the company’s in-home soda making system. That’s an awful lot of optimism, as seen in a stock chart, for a company whose big growth relies on sales of non-descript sugar waters.

SODA Chart

SODA data by YCharts

SodaStream, an older Israeli company running hot on U.S. growth, sells coffeemaker-type appliances for making fizzy drinks at home. Its success depends on customers’ continued purchase of CO-2 and flavors, which SodaStream sells for much bigger profits than the machines get. It’s the vulnerability of these consumable profits that could eventually flatten the grand enthusiasm for the shares.

SodaStream sells its own flavors plus syrups for branded drinks like Kool-Aid, Crystal Light and Country Time. The company doesn’t say exactly how much of its $436.3 million 2012 revenues came from flavor sales – it reports that about 55% were from consumables, which includes flavors and CO2 refills – but it’s clear that flavor sales are a big part of its strong gains. Flavor unit sales were up 49% last year, twice as much as CO2 refills and almost twice as much as soda makers. Total revenue growth, dollar-wise, was 51%.

SODA Revenue TTM Chart

SODA Revenue TTM data by YCharts

So far, SodaStream has the flavor business all to itself. But since it takes no ingenuity to bottle syrup, there’s little to stop grocery stores or even its branded partners from selling discounted flavors next to SodaStream’s line. And that’s a scenario that would surely knock back SodaStream’s share price.

SodaStream's financial data may not be as illuminating as is the experience of a similar stock. Green Mountain Coffee Roasters (GMCR), a SodaStream-type business, sold off sharply in 2011 when Wall Street realized suppliers could become competitors. Green Mountain once cornered the market for the K-Cups needed for its single-serve machines. Now store brands, and even their own partners, sell cheaper knock-offs. Those harmful partners included Kraft Foods (KRFT), a SodaStream partner.

SodaStream’s share valuations are nowhere near what Green Mountain commanded in the months and years before its correction, and many investors will take comfort in this difference. A previous YCharts article examined the question of whether SodaStream is the next Green Mountain.

SODA PE Ratio TTM Chart

SODA PE Ratio TTM data by YCharts

Yet SodaStream’s PE ratio, modest as it may look against Green Mountain’s, is held up by some not-so-modest expectations. The big buying in SodaStream shares began after a May 13 investor conference that included predictions of $1 billion in annual revenues by 2016. The share price now is vulnerable to any threat to that growth, like signs of faddishness. The company claims long-term adoption here has been better than expected. But as a nation with closets full of dusty juicers, pasta makers and exercise equipment, there’s plenty of time yet for Americans to lose interest.

SodaStream’s future is also vulnerable to too much success; the kind that creates a market only to feed the competition. Right now, no one seems interested in competing for this business. That could change in a heartbeat. Major beverage companies, including Coca-Cola (KO) and PepsiCo (PEP), would not need SodaStream’s help to bottle or to distribute syrups. Or to make soda machines, for that matter. It took Starbucks (SBUX) barely a year as a Green Mountain partner to develop its own competing coffee maker and pods. And they had K-Cups to deal with.

For investors, there’s probably a sweet spot in there between the buzz and the backlash. It would take some luck to find it. When the core product has no moat, it could be gone in an instant.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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