SodaStream Earnings: Post Mortem

So, it appears that Sodastream (NASDAQ:SODA) is in fact not Green Mountain Coffee Roasters (NASDAQ:GMCR) as I surmised earlier. First quarter actuals came in well above expectations and projections for 2012 were raised from the last report. Not only that, it was revealed on the conference call that Sodastream machines and flavored syrups will be in 2,900 Wal-Mart (NYSE:WMT) locations by the end of May, with CO2 exchanges to be introduced in the near future. For the most part, first quarter's earnings, both the announced results and the conference call afterwards, went better than I could have ever expected.

I Proved I'm Not GMCR, And All I Got Was This Lousy T-Shirt

SODA 3 Month Performance

Taking a look at the 3 month chart, the stock is still in a clear downtrend. Even with the pop after the earnings announcement, SODA never got more than 10% higher than it was before the GMCR earnings implosion and has given a large portion of it back. As of May 14, SODA is basically back to where it was before the GMCR earnings were announced. The estimates were blown away, analysts were caught off guard by the switch to reporting in USD and the shorts ran for cover. All that, and anyone that didn't get more in the few days prior to earnings hasn't seen any appreciation from the blockbuster report.

This just goes to show how fickle the market can be. The company has not lowered guidance or missed an earnings report, top or bottom line, since it went public. The whipsaws and implosions that we have seen are entirely due to the irrationality of today's markets as the company continues to successfully execute its growth strategy, quarter after quarter.

When You Have a Hammer, Everything Looks Like a Nail

Or in this case, when you view Sodastream as a fad, anything can justify a sell.

Take their announcement of a Wal-Mart rollout as an example. Some are already saying that the rollout is too much too soon and that their projections are too low to be including the additional sales that a Wal-Mart expansion would entail, so the company must be projecting decreased sales in its established retail outlets.

The problem with this argument is that it requires a belief that the market for SODA products is somehow restricted and adoption can't be accelerated to meet projected demand. If they don't move into Wal-Mart, they aren't going to grow fast enough and will stall out. If they do move into Wal-Mart, they are growing too fast and will stall out. It operates under the belief that the SODA product is a fad and therefore will eventually reach a point of saturation and become somehow undesirable in the marketplace.

While growth will eventually slow as it penetrates their addressable market, the same is true with all products and all companies. To say that the company will never be able to innovate or diversify and avoid the pitfalls of becoming a fad is quite the judgment when the observable history shows a company that has been successful, even growing during a recession, in its main European markets while in the midst of a global rollout into major markets. Add that to the fact that company is innovating within its industry with the introduction of Flavorcaps and branching out with its new Aquabar water filtration/carbonation product and the calls of "Fad! Fad! Fad!" sound increasingly desperate as the valuation becomes more and more attractive.

If you believe Sodastream to be a fad, then it will be almost impossible to convince you otherwise. It would be interesting to hear from those that believe SODA to be a fad. What would it take, results wise, for you to come off of your fad hypothesis?

What Now?

Earnings were great, my call was pretty much spot on, but the stock has barely budged, factoring out the GMCR impact. For shorts, the fad argument is strong enough, it appears, to override fundamentals and continue justifying a sell off. The initial decline from 39 in premarket to 34 was profit taking, the rebound was value seekers getting long and now the banksters, shorts and value seekers are fighting it out over 35.

If you follow Max Pain Theory for how options influence stock moves prior to options expiration, what price do you think Max Pain reflects right now? Why, 35 of course.

Since Max Pain is at 35, the bankers are working on the side of the shorts to combat the value seekers and collect their options premiums by keeping it at this level. My belief is that once the bankers are no longer incentivized to keep SODA at 35 after this Friday, the price will be allowed to rise again and shorts will feel the squeeze that they have thus far been spared.

If this scenario does not play itself out over the next weeks, I could see SODA heading down to 32 again; the bottom of its pre-GMCR trading range. While the fundamentals are improving consistently, shorts are utilizing fad fears to trade SODA down without too much effort. My feeling is that even if the shorts are able to get SODA back down to 32, it may be the last time for quite a while barring a global recession or a stock split.

If SODA does head back down to 32, I would suggest strongly either acquiring shares or purchasing LEAP calls as the shorts are never able to maintain control forever and this high growth company is already working to alleviate fad concerns through innovation and diversification.

Disclosure: I am long SODA.