SodaStream: A Market Of One

Summary

SodaStream no longer faces competition from Keurig.

The company continues to grow product sales and the user base despite the volatile machine sales.

The stock has plenty of upside despite the recent rally as machine sales start to rebound.

Despite the struggles at SodaStream (NASDAQ:SODA), the company has remained highly profitable. Not to mention, the market's domestic focus on soda machine sales has continuously missed the thriving business in Europe.

Source: SodaStream website

The company got some good news on competition last week, but the stock has rallied over 50% in the last month or so. Is now the time to still own SodaStream?

Looking Beyond The Headlines

For a starting point analysis, SodaStream is only worth $445 million now. The big gains during May came off an extremely low valuation level.

The analyst expectations for 2017 sales are around $460 million. For Q1, the home beverage system manufacturer produced a huge revenue beat of nearly 11% so analyst estimates might undervalue the opportunity here. SodaStream is completing the shift from a focus on beverages to water.

The end result of the struggles with selling North America consumers on making soda at home was a shift in the focus to water. The impact was that machine sales dipped over the last couple of years, but the core users continued to grow.

As the below chart highlights, the gas refills continue to grow at a consistent clip. The end result of the dip in machine sales is that SodaStream is now reliant on consumable revenues with over 65% of Q1 revenues related to gas refills and flavors.

Click to enlarge

Source: SodaStream June presentation

In the latest quarter, the company earned roughly $51 for each machine starter kit versus the consumables that the company estimates as producing $240 over a 5-year economic period.

The difference between selling 4.5 million machines at the peak in 2013 and only selling 2.4 million last year was an immediate impact of over $100 million to sales. The key though is that the additional units on the market continue to drive consumables that drives long-term growth.

Competition

The interesting news of last week was that Keurig Green Mountain (NASDAQ:GMCR) has decided to drop the premium beverage maker that was set to compete against SodaStream. The Keurig Kold at a price point far above $300 had a difficult time justifying the cost to North American consumers that can easily pick up pre-made soda at stores at similar if not cheaper prices.

In that regard and considering the shift to water by SodaStream, the Keurig Kold wasn't really seen as disruptive competition anymore. If anything, the marketing dollars from Keurig could've helped expand the market for all cold-beverage machines.

The discontinuation of the Keurig Kold was probably more a neutral than the market characterization by Bloomberg as a victory for SodaStream.

Takeaway

With a market of one, SodaStream has to do all of the marketing to build the market. On the flip side, investors don't have to fear the company losing to a stronger competitor.

At the end of the day, the stock is relatively cheap despite the rally to $21. At a market cap of $450 million, SodaStream makes for an interesting investment as water, beer or any other cold beverage could provide a catalyst for machine sales and a higher stock price.

Disclosure: I am/we are long SODA.

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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.