A SodaStream Mea Culpa

This article is now exclusive for PRO subscribers.

I have a confession to make. A week ago I submitted an article entitled "SodaStream: The Last Cheap Growth Stock". Talk about the bad timing award! SodaStream (NASDAQ:SODA) opened down over 20% after pre-announcing poor fourth quarter results. Luckily, my article did not end up getting published that day, a good call on the part of the editors at Seeking Alpha, because it no longer would have made any sense and only would have served to make me look foolish, something I admittedly probably deserved. The drastic slowdown at the end of the year invalidated my thesis that SodaStream was a good growth stock selling at a reasonable valuation.

I toyed with the idea of re-writing my article to make a more value-oriented argument for SodaStream at the new lower price. However, this struck me as disingenuous since my original view had been so blatantly debunked. Instead, I spent the week feeling guilty that I had dodged such an embarrassing bullet and trying to make sense of the collapse in such a promising growth story. I considered the argument put forth (notably by my wife, whom I obviously should have listened to since she always seems to have a better grasp on consumer trends than me) that SodaStream was a fad that was due to end spectacularly badly once they had saturated the small subset of consumers who would actually want to make their own soda amidst already shrinking demand for carbonated beverages.

However, I also did not want to overreact to a single poor holiday season where the company or their distributors overestimated demand and needed to offer larger discounts to move their products. After all, getting their machines into the hands of consumers, even at or below cost, might still pay off in the future if they end up buying the higher margin CO2 canisters and flavors that the company also sells as part of the tried-and-true razor/blade business model. Revenue growth was still fairly strong, hardly the hallmark of a trendy business that is about to completely dry up, and the stock is now dirt cheap if this is merely a small speed bump in a long growth runway.

Finally, I admitted to myself that I simply didn't know enough to make an educated decision. This is an excruciating admission for anyone that prides themselves on trying to make sense of an often incomprehensible market. I did not want to completely give in to the skeptics and short sellers who were crowing that they were right and perhaps arrogantly continuing to short the stock after a temporary correction set it up for another run. But I also did not want to compound my own mistake and buy more shares in a company I obviously did not understand well enough to have any sort of competitive advantage in.

So I did what is often the hardest thing to do: nothing. Yet, this is often the correct choice, a sentiment echoed by Warren Buffett when he says "the trick is, when there is nothing to do, do nothing" and "much success can be attributed to inactivity". Rather than rush to judgment like most investors are wont to do, I'll just have to sit patiently and watch the story play out for a while longer before updating my position. Management's upcoming discussions during the next several conference calls will hopefully shed some light on whether the tough holiday quarter was a one time hiccup or omen of more lean times to come.

Things look bad right now, but expectations have clearly been adjusted lower, perhaps excessively for a company that still has a lot going for it. Since SodaStream styles itself as a healthier (SodaStream's flavors typically have less sugar) and greener (less plastic waste generated by reusing the same bottle) alternative to pre-bottled soft drinks, it could ride these emerging trends and continue to be a disruptive force against the sagging demand for impotent potables, to use a Jeopardy inspired double pun-tendre.

Alternatively, it's hard not to underestimate the laziness of the typical American consumer that doesn't want to deal with the additional hassle of having to make something themselves that they could just buy, dooming SodaStream machines to be stuffed under the sink with their old George Foreman grill, Slap Chop, or fondue set. With a remarkably high short interest still remaining, this seems to be the prevailing sentiment. However, this might be just as dicey a proposition as the aforementioned Slap Chop, since the stock still has strong fundamentals even after the disappointing quarter, trading at a reasonable P/E ratio under 20 even based on the updated earnings projections.

It's also hard not to read too much into the company's announcement of Scarlett Johansson as their "Global Brand Ambassador". This could either be interpreted as evidence that their product is about to enter the mainstream, or as the desperate Hail Mary pass of a struggling product, fitting since she'll also be starring in the company's Super Bowl commercial. While it could be a catalyst for future growth, since it will introduce consumers to a new product category of single serving SodaCaps, more likely it is just added noise to the cacophony of mixed signals swirling around this battleground stock.

The company is clearly at an inflection point right now and there could be impressive gains to be made if you can predict which way things will turn. I don't feel there is quite enough information yet to sort out all the conflicting data, so I'll be waiting on the sidelines and doing more research before I consider selling my shares or adding to my position. So, if it's not too much to ask you to accept some words of wisdom from someone that looks like such a fool right now, I would say that sometimes the best course of action is to admit when you're wrong about something you don't fully understand, rather than digging in your heels and making it worse by making an uninformed decision just to try to save face.

Disclosure: I am 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.