On November 9th, Sodastream International Ltd. (NASDAQ:SODA) announced its Q3 earnings. This was an especially important earnings announcement after SODA's Q2 failure. By failure, I am referring to when the company beat Q2 earnings but failed to raise guidance, subsequently sending the stock plunging more than 50%. Investors understood the failure to raise guidance as a sign that growth was slowing, and so the Q3 earnings announcement was crucial to either confirm or prove false these concerns.
SODA reported earnings 65% above expectations and the CEO drastically increased annual earnings estimates. Naturally, one would think this would result in the stock skyrocketing as concerns about slower growth eased and the large percentage of investors shorting the stock covered their positions. If this was what you expected, you’d have been right....for the first hour of the trading day. The stock skyrocketed 15% in the morning but decreased in the afternoon and coming week, to levels lower than before the earnings announcement.
How can we explain the movement of the stock? The market believes SODA is a fad and no one wants to invest in this company for the long term. Thus, any large spike in the stock causes investors to sell and take profits. Though previously employing the same short term strategy, I have changed my perspective following this quarter’s earnings estimates and I am now prepared to invest in Sodastream for the long haul. I have not been made a believer because SODA has beaten earnings by a wide margin virtually every quarter since going public (though it has helped). Rather my new confidence stems from recent good news reported by the CEO during the conference.
Along with the positive earnings report, CEO Daniel Birnbaum, informed investors of an increased number of purchase locations in the US. After a successful test with Costco (NASDAQ:COST), Sodastream machines will be available at 240 locations for the Holidays. Best Buy (BBY) has increased Sodastream purchase locations from 700 stores to all 1000. After a successful test at Staples (SPLS), Sodastream machines are now available at all 1100 Staples locations. Furthermore, SODA has increased gas refilling stations in the US to 4800 locations from 2600 in 2010. This was a result of both Macy's (M) and Staples offering refillables at all their locations. This news is fantastic for two reasons. First of all, it shows that consumer stores in America have faith in the product's saleability in the U.S. Secondly, it highlights Sodastream and their distributor’s acknowledgment that gas refillable stations are crucial to success in America. If investors think Sodastream is a fad, it is evident that consumer stores across America disagree.
It is also important to note just how little exposure Sodastream has in the United States. It has so far entered less than 0.5% of American households. Even if Sodastream is a fad, it is unlikely it has reached the peak of its popularity. Increasing exposure to American households would likely scare away the shorts and result in a short squeeze. In summary, this stock has huge upside potential and very limited downside risk.
The data is sourced from Yahoo Finance. The earnings report can be listened to here. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I am long SODA.