Earlier this week, SodaStream (SODA) investors were shocked to see the company's lowered guidance and a 26% decline in the share price of the company that followed the weak guidance. The company's new guidance was calling for revenues of $562 million compared to the earlier guidance of $567 million, and the guidance for the net profit was $52 million compared to an earlier guidance of $65 million. A lot of people were worried that the company's growth was coming to a halt because it had to offer deep discounts during the holiday season in order to meet sales goals.
On Tuesday, SodaStream's management participated in the Annual ICR Xchange Conference for a 30-minute presentation. During the short presentation, a lot of good points were made and the company's management confirmed that despite the short-term challenges experienced by the company, it was still on track to meet the long term goals, such as reaching revenue of $1 billion by 2016. According to the presentation, SodaStream will continue to see margin pressures in the first two quarters of 2014; however, the company's margins and growth rate will return to normal levels in the second half of the year.
While some of the issues faced by the company are external (such as the currency exchange rate effects), many of these issues are internal and these are the things the company can fix. For example, SodaStream's production costs were higher and price mix was lower during the last quarter, and according to the presentation, these two items are already in the company's "to fix" list.
During the presentation, we were reminded of SodaStream's growth story, which is still intact. SodaStream generated $146 million in 2009s revenues followed by $213 million in 2010, $310 million in 2011, $436 million in 2012 and $562 million in 2013. Basically, SodaStream has been posting double-digit growth every year since 2009 and the company's average annual growth rate is 40.07%. When a company has such a growth rate, it makes little sense for it to trade for a lower P/E than Coca Cola (KO), which has an annual growth rate of 4-5%. According to the presentation, the management doesn't believe that the company's growth rate is slowing and they are still very confident that the company's revenues will reach or pass $1 billion by 2016.
In the presentation, it was mentioned that SodaStream has 7 million active customers, which means there are 7 million households that already own a SodaStream machine and they regularly purchase ingredients from the company to make their own soda at home. SodaStream's business model actually calls for many return customers rather than new customers because SodaStream machine itself carries low margin; however, ingredients carry much higher margins. This is why the company makes more money after (not before) selling a SodaStream machine. One example is Switzerland. In Switzerland, 18% of SodaStream's revenues come from machine sales and 82% of the revenues come from ingredient sales. As a result, the average operating margin in Switzerland is 25%. In comparison, when we look at the U.S., 46% of the company's revenues come from machine sales and 54% of the revenues come from ingredient sales. In the U.S., the company's operating margin is around 5%. This is why the company wants to have as many return customers as possible, since selling the machines is not that profitable for SodaStream.
In the last 12 months, SodaStream machines owned by consumers created 3.5 billion cans of soda. The product is particularly popular in Europe where preparing one's own food at home is more popular than it is in the U.S. In the comments section of my last SodaStream article, some people argued that SodaStream wouldn't really save them much money because they could buy 12 packs of soda for as little as $2.5 in their local grocery store. While soda is pretty cheap in the U.S., this is not the case in many parts of the world. For example, in Europe, canned soda will cost much more than what it will cost in the U.S., which makes SodaStream more popular in the continent.
Besides, it's not all about cost either. Think of it like a smart phone. Today we live in a society where we love to customize things and show our individuality. Every phone owner uses a different ringtone,a different screensaver and a different wallpaper, because people like to customize things to their own taste. The same also goes for drinks. Many people might think that the canned sodas sold in stores carry too much sugar, too much sodium, too much this or too much that. When people own their own soda machine, they can mix and match the ingredients however they like. They can even experiment with different amounts of different ingredients to see what they will like better. Making your own drinks at home is far from a fad and it is catching up in many parts of the world.
After hearing the management's assurance that the margin issues are temporary and addressable, I am convinced that SodaStream's recent sell-off was an overreaction. In fact, since the presentation, the stock price recovered from its Monday lows by about 10-12%. There is still a lot more room for this stock to recover in order to justify its growth story.