Is SodaStream the Next Green Mountain Debacle?
The bull case for SodaStream International (SODA) sounds identical to the one once flouted by Green Mountain Coffee Roasters (GMCR), a razor/razorblade business model for a newfangled way of getting a drink. SodaStream, like Green Mountain and its K-Cup-enabled coffee makers back in the day, is one of the hottest companies on and off Wall Street.
So is there a potentially devastating PowerPoint presentation in SodaStream’s future stock chart, too?
Green Mountain suffered that 50% share price fall in 2011 after David Einhorn pointed out several issues investors were overlooking in their glee over Green Mountain’s growth. With a series of slides, the hedge fund manager made Green Mountain’s lofty share price – and the investors who fell for it -- suddenly look quite ridiculous. Israel-based SodaStream faces a couple of those same issues, with a much more modest share price.
SodaStream sells machines (its razor) for making cola, sparkling water and other carbonated drinks at home. Its high-margin razorblades are flavor packets, some in K-Cup-like pods, from places like OceanSpray and Kool-Aid. The machines require CO2, which customers replenish by swapping empty canisters for full ones at places like Bed Bath & Beyond (BBBY) and Wal-Mart Stores (WMT).
SodaStream leads its niche in about a dozen countries, but half of its growth projection for coming years depends on strong U.S. sales. Because of optimism here, SodaStream is calling for overall revenues to more than double to at least $1 billion by 2016. Investors, like those in Green Mountain’s past, are psyched about SodaStream because it has a new way to exploit a huge market. Fast Company magazine recently named SodaStream one of the world’s most innovative companies of 2013.
Einhorn slaughtered Green Mountain in part by proposing that its key market was smaller than investors thought; not all households that own a coffee makers, but rather, regular at-home coffee drinkers.
SodaStream, arguably, tends to overdo the size of its market also. The company presents its “Vast Global Market Opportunity” as the $264 billion carbonated beverages industry, noting that it only has about a 1% share of it so far. But SodaStream also contends that consumers latch on to its products mainly to avoid lugging home, and then trashing, bulky bottles and cans. Realistically, that makes its market the considerably smaller demographic of regular at-home soda drinkers. In the U.S., that’s a shrinking population. Sales of carbonated soft drinks here have been in decline since 2005, according to Beverage Digest. Consumption fell faster last year than the previous year.
On Green Mountain, Einhorn suggested that customers were losing interest in the product over time. He questioned Green Mountain’s accounting on several fronts and noted that it had begun to deny investors hard data, like unit sales of K-Cups, which might reveal faddish elements.
Here, SodaStream has offered more reassurance in its financial data. It reported unit sales of CO2 refills up 24% last year and flavor unit sales up 49% against soda machine unit sales growth of 29%. (Remember that supply sales lag machine sales.) Analysts at SodaStream’s investor conference May 13 also loved the company’s chart showing 70% of its U.S. customers still using the system after 1 year, and 80% of its active users drinking it at least once a week. New flavor suppliers and distributors are expected to help both attrition rates and sales in upcoming quarters. Also, sales are still growing in older European markets.
For Green Mountain, Einhorn’s most damning hit was his prediction that expiring patents on K-Cups would bring major, profit-depressing competition. He was right.
It’s not hard to imagine a competitor bottling flavor for SodaStream machines. It would be considerable more work to develop a compatible CO2 canister and line up swap stations for them. On patents, SodaStream’s latest Form 20-F says, “Our current patent portfolio is limited and certain patents of ours that cover aspects of our products have expired.” So far, however, no one seems particularly interested in the business.
In conclusion, SodaStream does face issues that so alarmed Green Mountain investors. But it’s possible that SodaStream investors are more aware of these risks. Its PE ratio of 30 is nowhere near what Green Mountain’s triple-digit, pre-crisis PE ratio.
That lower valuation makes SodaStream’s share price less vulnerable to a catastrophic fall in an Einhorn-style attack. Is it low enough? We’ll tackle whether SodaStream makes a good growth investment in a future column.
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 firstname.lastname@example.org.