SodaStream: Tremendous Growth Prospects And Potential Buy Out Target

SodaStream (NASDAQ:SODA) has seen its business grow over the years. It continues to benefit from increasing consumer awareness, channel expansion, and new product introductions. The company is well suited to grow on its own, but many investors are predicting that (despite rumors to the contrary) the company is up for sale and will accept a premium buyout offer over the next few years.

Company can grow on it's own just fine

SodaStream relied heavily on advertising and promotions in 2012, which included a commercial during the Superbowl. As a result, 2012 was a monumental year as the company saw its products sold at 15,000 doors (compared to 9,500 a year ago and just 300 doors in 2008). This followed deals with Wal-Mart (NYSE:WMT), Bed, Bath & Beyond (NASDAQ:BBBY), Macy's (NYSE:M), Williams Sonoma (NYSE:WSM), and Target (NYSE:T). The company can continue to benefit from additional distribution networks over the next few years.

One such opportunity would be with supermarket channels that can aid flavor sales with a higher gross margin. In addition, the company is launching single-use SodaCaps (similar to Keurig's K-cups), which should help garner incrementally higher-margin flavor sales during the important holiday season.

The company only has a household market penetration rate of 10% or higher in four countries globally, which include its native Israel, the Czech Republic, Denmark, and Finland. It is only beginning to gain traction in the U.K (currently ~1% household penetration, on par with the U.S) and Germany, where it receives solid shelf space and promotional focus at major retailers. As such, the company has ample opportunities to continue growing over the years in under-penetrated countries in Western Europe, North America and Asia.

Buyout target?

Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) both have substantially higher spending power, but SodaStream holds all the cards. Coca-Cola and PepsiCo have three options in dealing with SodaStream.

1) Coca-Cola or PepsiCo decide to purchase the company for a premium to the current share price. Doing so would reward SodaStream shareholders with a premium while Coca-Cola or Pepsi gains penetration to the single serve beverage market that is increasing in popularity.

2) Coca-Cola and/or PepsiCo enter the single-serve beverage market on their own and launch soda-maker systems. At first, this might seem like a negative for SodaStream, however doing so would drive increased category attention. The company could leverage its first-mover advantage to win over customers in a newly crowded space.

3) Coca-Cola or PepsiCo can sign strategic agreements for flavor manufacturing or begin manufacturing its own flavor offerings for the SodaStream system.

The coffee market

Green Mountain Coffee Roasters (NASDAQ:GMCR) entered the do-it-yourself, at home, single-serving (or however you want to call it) coffee market to great success. Today, the market is growing faster than traditional coffee markets and is valued at $10 billion. Green Mountain Coffee Roasters is the closest comparable peer to SodaStream due to its impressive top-line and earnings growth rates over the last five years. Green Mountain has successfully navigated the coffee space as the "smaller" player competing against the "big boys."

SodaStream's rapid expansion of retail doors compares to Green Mountain, which saw similar rates during its early adoption phase in the mid-2000s. SodaStream's expansion efforts are particularly impressive considering its positioning in a previously non-existent category as single-cup coffee brewers already existed prior to Green Mountain's high-growth phase.

My third scenario mentioned above can be best compared to the agreement that Green Mountain signed with Starbucks (NASDAQ:SBUX). Under the agreement, Starbucks will sell single-serve pods (K-cups) for brewing with Green Mountain's Keurig machines. Starbucks considers the agreement a "global single-serve coffee industry game changer" and a "win-win-win agreement for both companies and for premium coffee consumers around the world." Starbucks is to coffee what Coca-Cola and PepsiCo are to soft drinks.

Investors who believe that Coca-Cola or PepsiCo can squash SodaStream need to examine the coffee market. Starbucks first entered the single-serve market with its Via Ready Brew instant coffee in 2009 and the "Verismo" in 2012. Today, Starbucks enjoys a higher distribution channel through Green Mountain, having shipped over 1 billion individual pods in just 20 months.

Final thoughts

SodaStream should perform more like Green Mountain based primarily on its similar razor/razor blade revenue stream model. The company operates a textbook definition of such a model, selling soda maker kits (similar to the Keurig coffee machines) at a profit, but making a higher percentage profit on the ongoing, recurring sales of consumables (flavors, and CO2 refills) similar to Keurig K-cups. SodaStream should be considered a high-growth story with upside to be seen over the coming years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.