Sodastream International Ltd (SODA) Is a Fad

Sodastream International Ltd (NASDAQ:SODA) shares surged early on Thursday before later pulling back. An Israeli tabloid had reported that the company was in talks to be acquired by PepsiCo, Inc. (NYSE:PEP) for as much as $95 per share.

The idea that a company like Pepsico would want SodaStream is absurd — although this stock has been a solid performer in recent months, its business is fundamentally based on a fad (one that has been seen many times in the past) and isn’t a sound, long-term investment.

The next hot kitchen appliance

Analysts are currently projecting that Sodastream International Ltd (NASDAQ:SODA) will grow its earnings by 25% over the next five years. In order to produce those kind of results, the company will need to continue to grow in the US, getting more consumers to turn to a kitchen appliance for their soda needs.

Over the years, there have been many of these “next big” appliances — Spectrum Brands’ George Foreman grill immediately comes to mind. Sure, there was a market for it, but as short seller Jim Chanos has noted, it was ultimately a niche product — it had its uses, but was never able to replace the traditional grill.

As Mary Maushard (writing in 1990) observed, countless devices have attempted to become the next kitchen staple — juicers, waffle irons, popcorn poppers, crepe makers, etc. But outside of the traditional coffee maker and toaster, none of these devices have found their way into a meaningful percentage of American homes.

The model doesn’t make sense

Fundamentally, Sodastream International Ltd (NASDAQ:SODA)’s business model just doesn’t make much sense. The company is built on the premise that consumers would prefer to use its home machines in place of buying soda at a store. There are a number of problems with this idea.

First, consider the fact that a particularly high percentage of soda isn’t even bought by consumers directly. In its most recent 10K, The Coca-Cola Company (NYSE:KO) notes that 38% of its revenues are derived from the sale of concentrate. That is to say, at least 38% of the time, consumers are buying Coke products somewhere besides a traditional store — a restaurant, a bar, a fast food drive-thru, wherever.

Second, there’s a great degree of brand loyalty among soda drinkers. The backlash Coke received from its decision to change its recipe in the 1980s is proof enough that; PepsiCo, Inc. (NYSE:PEP)’s “Pepsi Challenge” and “Ask for a Pepsi” advertising campaigns have attempted to both up its own brand loyalty, and dispel some of Coke’s.