On Monday, SodaStream (SODA) saw its shares crash from low $50s to high $30s after the company released weaker-than-expected guidance for the fourth quarter and full-year of 2013. This crash might have been warranted since the company's shares were already in a downtrend from high $70s and a lot of bad expectations were already priced in. Keep in mind that SodaStream is currently down 50% from its 52-week high price based on worries that the company's growth might be coming to a halt.
First, let's talk about the company's latest results. In 2013, SodaStream generated $562 million in revenues and $52.5 million in adjusted net profits. This represents all-time record sales and profits for the company and the growth story continues on. The company wasn't able to achieve the margins it was looking for because it had to offer more discounts than planned in order to push its products in certain markets during the holiday season. Keep in mind that during the last quarter's earnings call, SodaStream guided for a 30% increase over 2012's revenue of $436.3, which would come down to $567.19. Basically, the company missed its revenue estimate by only $5 million, which represents a 1% margin of error.
The company's total revenue of $562 million represents a growth of 28.89% over the revenue of 2012. Obviously, the company's double-digit growth continues on. SodaStream has been enjoying solid margins despite investing heavily into international growth in the last year or so. It is usually difficult to achieve strong margins (profitability) and high growth simultaneously as we've seen in many companies from a variety of industries like Amazon (AMZN), Tesla (TSLA) and Pandora (P).
During the last earnings call, the company's CEO Daniel Birnbaum was asked about how confident he was about the company's long term goal of reaching $1 billion in revenues by 2016. He basically said that he was very confident and the company was on its track to deliver $1 billion in revenues by 2016. I am sure they will reiterate the same thing during the earnings call for this quarter, because they missed their revenue estimate by only 1% for the full-year of 2013. Wall Street is usually very generous when it comes to companies that are growing in double digits. As long as a company posts double-digit revenue growth year-over-year, Wall Street hasn't been caring much about net earnings. Companies like Amazon, Tesla, Pandora, SolarCity and Yelp are generously given triple-digit P/E ratios since they continue to tell the story that "they would have been profitable if only they didn't invest into growth" but when SodaStream grows in double-digits and shows profits while doing this, the market decides to punish the company with a low P/E of 20. Just to give an example from the same industry, Coca Cola (KO) has a growth of 3-4% in a good year, and it gets the same P/E as SodaStream which enjoys a growth rate that is 10 times as high as Coca Cola.
Currently, SodaStream enjoys a net profit margin of 9.35% and if the company were to maintain this margin after reaching $1 billion in annual sales, it will have a net income of $93.5 million. Of course, if the company doubles its revenue, it is likely to expand its margins by improving efficiencies in its production and distribution channels. With net profits of $93.5 million and some years of growth remaining (after all, the company's growth won't just end there all of a sudden once it reaches its long term target), SodaStream could easily sell for a P/E of 15 in a market where Coca Cola enjoys a P/E of 21. This would value the company at $1.40 billion, which comes down to $67 per share. Once the company earns about $100 million or more annually, it would have more than enough cash flow to support a buyback program, which would make each share even more valuable (or at least get in the way of any future dilution).
Currently, the market treats SodaStream as if its growth story is over, and it completely writes-off the idea that SodaStream will be reaching $1 billion in annual sales by 2016, even though the company's management kept reiterating at every conference and meeting that the company is well on track to achieve this goal. This is one of the rare times where a CEO gives strong long-term guidance but the Wall Street completely ignores it.
There are many markets where SodaStream's growth continues and many more markets where the company hasn't even launched its products yet. While the company's announcement said that it would quickly return back to higher margins, Citibank's analyst Wendy Nicholson doesn't seem to buy this story and she calls the company's management "overly confident."
While the top line miss was not substantial, SODA's profit miss was a lot more concerning, as the company cited a "challenging holiday selling season in the U.S." along with "lower sell-in prices and higher product costs, a shift in product mix vs. plan, and unfavorable changes in foreign currency exchange rates." While some of these issues are external (e.g. f/x), some are ones that we would have hoped SODA could have managed thru more effectively (e.g. product mix). Further, while SODA does expect some of these headwinds to continue in 1H14, the company also stated it would move quickly to restore margins back to historical levels for the upcoming year. That said, given management's seeming confidence as of the end of their 3Q with respect to their 4Q outlook, which proved to be wrong, we think management's guidance for a recovery in margins in 2014 requires a bit of a leap of faith right now.
SodaStream hasn't produced any guidance for the year of 2014 but we can expect such guidance to come during the earnings call. The management's immediate guidance will determine whether the investors will continue to punish this company. I always believe that one data point doesn't make a trend and one weak quarter doesn't necessarily mean a company is in trouble. SodaStream still has a lot of promise and those who have been waiting for a pullback to initiate a position might have found their chance right here.
I don't think SodaStream's crash is warranted and the investors are definitely overreacting here. In a market where many "story stocks" are getting triple-digit P/Es, it makes little sense for SodaStream to have the same P/E has Coca Cola which grows at a rate that is 10% of SodaStream's growth. That's like assigning Tesla the same P/E as GM or assigning SolarCity the same P/E as First Solar.