SodaStream Just a Fad or the Real Thing?

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As a small investor, I love finding hidden opportunities where Wall Street doesn’t have much analyst coverage. This particular experience began with a Peter Lynch investing philosophy, and over time, it has become a great household appliance.

SodaStream (NASDAQ:SODA) came into my view through IPO research in November 2010. It got my attention as an early Green Mountain Coffee (NASDAQ:GMCR) and Hansen’s Natural (HANS) investor. In this case, I didn’t want to let a great investing opportunity slip through the cracks. I did some brief analysis and noticed that SodaStream is huge in Sweden, commanding a dominant 20% market share. The company is based in Israel but currently has sales in Europe, Asia, Africa and the U.S. Its lion share comes from Europe, with about 50% of its revenues. The U.S. has about 23%, with Asia and Africa contributing the final 27%.

Here’s where it gets interesting: With a solid understanding of SodaStream’s finances, I still had not seen one, or even tried one, until walking into a Bed, Bath and Beyond (NASDAQ:BBBY). Was it worth it? Should I get one? After debating this for a few minutes, I bought my first SodaStream. The machine comes with a 12 pack of flavors, as well as three natural sparkling waters: A welcome addition for a novice soda maker.

After a week of testing and tasting, I was hooked on the product. Things got even better when I realized the SodaStream energy drink sells for the same price as the soda flavors, and that the savings in comparison to Red Bull are fantastic. An 8-pack of Red Bull typically costs around $16 USD, which equals one 2 liter bottle. Getting six of those would cost $96. The same amount of energy through SodaStream would cost $4.99.

The energy drink market is expected to surpass $9 billion in sales in 2011. The market has been growing at an annual rate of 12%. If SodaStream can penetrate the dominance of Red Bull, which maintains over 40% market share, the stock price should follow. At current levels, SODA doesn’t have any market share, but with the cost savings (see college kids) one can see why this is a good alternative.

After being an owner of the SodaStream for a few months now, I’ve had many debates with people about the costs, convenience and other factors. The stock has been featured on CNBC with Jim Cramer and Herb Greenberg, and many on Wall Street are calling it a fad. In fact, current short interest sits at 4,200,000 shares, and roughly 28% of the stock’s float. Why is there such a lack of enthusiasm for the product? I don’t know, but I can guarantee that most of the shorts have never even tried a SodaStream. I will never understand how someone can pan a product without ever testing it on his/her own. SodaStream beat out Coke (NYSE:KO) on the CNBC Soda Challenge with Jim and Herb, and for good reason: It’s fresh and tastes better.

The device is sold for convenience, value and the environment (no more wasting of old plastic bottles). These are qualities that today’s consumer looks for in everyday products. SodaStream is currently being sold at J.C. Penney (NYSE:JCP) Bed, Bath and Beyond (BBBY), Kohl's (NYSE:KSS), Macy's (NYSE:M), Sears (NASDAQ:SHLD) and most recently Best Buy (NYSE:BBY). This is a good start, but one that could be expanded in the future. The reach could be enormous if the company partners with Wal-Mart (NYSE:WMT) or Target (NYSE:TGT), both huge untapped growth drivers.

Now we’ll move into the financial statements for some more color. The company reports in euros and unfortunately, many people are reading these numbers incorrectly. In fact, Yahoo Finance is showing EPS numbers in euros, deceiving many investors. Since the IPO, SodaStream has reported USD EPS numbers of .39 in Q3 2010, .27 in Q4 2010, and .38 in Q1 2011. Going along with these numbers, the shares outstanding have also increased from 13,500,000 to 17,100,000, and finally to 19,600,000 today.

Revenues have increased from $57 million in Q3 2010 to $64 million in Q1 2011. After looking over the company’s historical numbers, SodaStream typically has its weakest sales during the first quarter. The U.S. launch occurred at the end of 2010 and has been growing upward of 150% year over year. I have created a chart below to highlight historical revenue numbers:

EURO 1.36 EURO 1.33 EURO 1.42
13.5 shares 17.1 Shares 19.6 Shares
2010 2010 2010 2010 2011
Q1 Q2 Q3 Q4 Q1
Revenues 42,884,000 46,880,000 57,089,000 66,347,000 64,042,000
Americas 5,680,000 7,000,000 11,215,920 19,285,000 14,484,000
Europe 27,238,440 29,880,000 37,732,000 33,782,000 33,398,400
Asia/Africa 9,965,560 10,000,000 8,141,000 13,280,000 16,129,780

These numbers were acquired from historical press releases and converted to USD. These are my best estimates.

Looking ahead, I am forecasting U.S. revenue growth at 200% year over year, with Europe maintaining a 20% growth rate and the other geographical areas improving 20% quarter over quarter. Based on my calculations, I’m estimating revenues to be about $20 million in the U.S., $36 million in Europe, and $19 million in Asia/Africa for second quarter. That’s an estimate of $75 million, and I wouldn’t be surprised to see that number higher on the growth in the U.S. and Asia/Africa. Removing costs and expenses, I believe that the company will earn between .46 and .51 cents per share based on the 19,600,000 shares outstanding.

I’d like to point out that current Wall Street estimates are for .32 USD this coming quarter. The analyst coverage is very minimal and it seems to be lacking quantitative reasoning. I’m forecasting EPS for the first two quarters of 2011 at .84 -.89 cents versus .50 cents, with FY 2011 at 1.8-2.00 versus 1.01. At current levels the stock has room to grow, and the shorts will fizzle (pun intended). Maybe next time they’ll try the product or just look over the financials. In any case, I see SodaStream reporting a great 2011, and I'm excited about the future growth opportunities that lie ahead in 2012 and beyond.

With a great outlook, what are the risks? It’s safe to assume that the beverage industry has major competition. The bellwethers of Coke and Pepsi (NYSE:PEP) dominate, with many much smaller brands trying to grab market share. Is the SodaStream a fad, or does it have staying power like the Keurig? Only time will tell.

Disclosure: I am long SODA.