FreeMarkets (99.27)

FreeMarkets's CAPS Blog

Soda Stream

Recs

20

Report

August 20, 2011 – Comments (11) | RELATED TICKERS: SODA

I admit, CAPS is fun and you don't always have to do research to thumb up/down a stock. And when I saw people writing that Soda Stream was over sold, having fallen to under $50 after peaking at almost $80, I took a quick look at the company description.

Wow, I thought. What a great idea - personal carbonation products. Lots of people pay good money for soda and seltzer. Then I saw the market cap of nearly $1 billion! The Dr. Pepper/Snapple group has a near $8 billion market cap and pays a 3.5% dividend yield. So I thumbed down SODA.

But since then (I'm currently up on downing of SODA by about 18 pts, just one week ago), I've looked a litttle closer. You know, in this down economy, if people can save money they will do it. Maybe this is the little company that could.

So I went to their website, and saw that I could buy a large 33oz carbonator for ~ $50. I also noticed that once you exchange the 33oz carbonator, the price drops by 1/2 to ~ $25. Considering you can make about 60 2liter bottles of soda, your cost to simply carbonate water could be as low as 42¢ each. This is less than 1/2 the price of competitor iSi.

However, iSi uses a simpler system that can carbonate anything - orange juice for example. The soda stream can only carbonate water.

Now, you want to make soda! You have to buy their Soda flavor and mix it to the carbonated water you just made. Cost $5-7 and each bottle makes about 6 2liter bottles, or about $1 each.

OK, so I want to make my own soda and it's going to cost me $1.42 per 2 liter. Knowing full well the regular price of soda at the grocery store is $1.49, and sale prices range from 99¢ to $1.29.

And let's not forget the prices I've estimated above are AFTER you've already spent about $100 just to get the unit. So for zero cost savings, questionable cola taste, and the inability to carbonate other liquids, you still have to shell out $100?

Wait, wait, wait! You're missing the point - their bottles are reusable, so they're green. And we all know how the green market pays more for stuff that's environmentally positive.

The green market makes zero sense for this product. Soda is the antithesis of what most earthy, crunchy, pro-environment users believe in. Couple that problem with the fact that most states recycle plastic bottles, and the argument is moot.

I stick by my original, knee-jerk reaction. This company juiced sales after their IPO by selling deeper into the distribution channel. Expect a fall into the teens and then single digits. Personal carbonation has been around for decades and Soda Stream isn't changing the paradigm, they may actually be making it worse.

11 Comments – Post Your Own

#1) On August 20, 2011 at 11:30 AM, TheDumbMoney (58.97) wrote:

Although I did buy some shares at $41.70/share on the drop, this is my primary fear and if I see it I'll sell. Others have voiced it, including Peridot Capitalist. The next couple of quarters will be highly instructive.

I think it is very true and obvious that a lot of American growth has come from distribution gains. But currently America is 20% of Sodastream's business, with 80% coming from other markets, some mature. Included in those much more mature markets is Western Europe, where they saw revenues increase 22% during a time when Western Europe isn't going bangbusters; there it's not about distribution expansion. They have less than 0.5% market share in America, and even if they can get to 2%, it's a buy at this level. In Sweden they have more than 20% share, though those Swedes are crazy-folk!!

If it's just a fad, all bets are off of course.

Dr. Pepper gets 93% of its sales in the U.S & Canada (the remainder in Mexico, basically). It's a famous brand, it makes an eye-catching example, and it may be undervalued, but it's a U.S. company only and while not exactly going nowhere, has 90% debt/equity, and is inarguably quite mature here, and isn't going places really internationally as I understand it. Now if Dr.Pepper could get some real international mojo, it would be awesome. But Dr.Pepper is the American Football of soda companies at this point: loved here, ignored everywhere else.

Also, with Sodastream, you don't have to buy a carbonator separate from the machine (which you appear to imply), because the up-front cost of the machine/package, contrary to this: ("let's not forget the prices I've estimated above are AFTER you've already spent about $100 just to get the unit"), includes a carbonator. Unless you need a spare, you can just exchange the one you get initially.

Also, in larger machines, the 130-liter carbonator carbonates water for around $0.28/liter, though that does require a separate purchase.

Also, the cheapest model sells for $80, not $100, on Amazon, with free shipping if you have Amazon Prime.

Finally, I know lots of greenies, and the only thing they like more than recycling is not even having to recycle, because of the environmental cost of recycling all of those aluminum cans and plastic bottles. And they drink soda. How old are you? I think soda is the antithesis for baby-boomers, but for my generation (28 - 35), not so much.

Anyway, only time will tell. Anyone who sticks their life-savings in it has a problem, but clearly right now I'm taking the other side of that bet that it's going to the teens. Why don't you short it in RL? :-)

Nice critique; I'll be following the post.

Report this comment

#2) On August 20, 2011 at 1:37 PM, HarryCarysGhost (99.78) wrote:

Nice post and I'll be following also.

I picked it on Caps as an underperform and may do so again. In RL I'm content to add to my KO drip and not have to worry whether this takes off or not.

If it hits the teens I'll have to reavaulate and maybe change my stance.

If it skyrockets I'll say hats off to dumberthanafool.

Cheers.

Report this comment

#3) On August 20, 2011 at 6:47 PM, rexlove (99.24) wrote:

I have to agree with you on Sodastream. I think everyone thinks they are going to be the next Green Mountain the way the valuation keeps getting higher on this stock. But it's not. People will pay for an instant single cup of hot coffee. I love my Keurig machine. A fresh cup of coffee makes sense. But soda? Why bother making my own soda when I can get a bottle at the store on sale for 99 cents. Is their fresh soda somehow a lot better tasting then the store bought brand?

Report this comment

#4) On August 21, 2011 at 12:44 AM, JakilaTheHun (99.93) wrote:

Intersting analysis. Also interesting rebuttal by dumberthanafool.

I'm somewhat intrigued by SodaStream, but have kept away from it, because it appeared to be somewhat pricey (even at the current 'beaten-down' price.)

But if it really costs more to make your own soda than it does to buy Pepsi or Coke from the grocery store, then I would this would definitely have limited potential.

Report this comment

#5) On August 21, 2011 at 2:38 AM, concealedweaponR (< 20) wrote:

by what you said id down thumb it. pop isnt something people are thinking omg i gotta save on pop. n people are lazy. no ones going to pursue buying and makig their own. based on your article only. ill go look at company now

Report this comment

#6) On August 21, 2011 at 11:20 AM, David369 (23.60) wrote:

Both points of view have valid points and the bottom line it is probably more of a crap shoot as to which way it plays out here in the US. Or maybe more of a marketing thing as to how they market it. Really if they are selling as much as they are now and you don't even see any TV ads nor have I seen any magazine or other forms of ads. Heard about an ad in skymall magazine (airline mag). Can you imagine what they would do if they advertised the things? Europe is doing well and has been for a couple of years and I think Asia will do well. I figure we are too lazy and regardless of people who want to be "greener" it has been my experience lazy beats out green every time. So I figure 2-3 years growth in the US then a leveling off here and incremental growth in Europe & Asia. I don't know what to think about South America but my inclination is it wouldn't fly there.

Report this comment

#7) On August 21, 2011 at 9:47 PM, EnigmaDude (96.79) wrote:

Judging just by the number of posts and recs for the posts about SODA, it seems to be a highly followed stock on CAPS. That fact alone makes it a very appealling investment. Yes it may turn out to be a fad. And yes, the numbers may not add up. But the appeal to consumers, and especially those who want to "save" the environment, make it that much more appealling. It's not always just about the bottom line when it comes to investing. Sometimes you need to pay attention to emotions. I think SODA appeals to peoples' emotions.

Report this comment

#8) On August 22, 2011 at 11:19 AM, jimmy4040 (24.94) wrote:

It's not about the company but about the stock. Soon perhaps as early as this week, you will see another concerted push to drive it higher. You don't have to buy the stock, buy the calls for very little, comparatively speaking.

Report this comment

#9) On August 22, 2011 at 1:58 PM, Turfscape (41.17) wrote:

FreeMarkets, you have perfectly summarized why I stayed away from this stock. I had taken a look at this company over a period of several months...it didn't feel right for me, but there was so much "buzz" around it and people who bought one raved about them. It kept me interested, but that nagging feeling that this just wouldn't play out long-term kept creeping up on me.

After the stock took a nose dive, I momentarily thought "okay, now I'll jump in", but I stopped myself. If the business model didn't make sense to me at $55, or $62, or $70+ per share, then it still doesn't make sense to me at $40 per share.

I wish them luck. The whole 'make your own soda' thing seems like fun...but that's not quite enough for me to bank on.

Report this comment

#10) On August 24, 2011 at 3:53 PM, L0RDZ (70.28) wrote: