Sodastream International Ltd (NASDAQ:SODA) exploded 15% last week after the company crushed earnings expectations and increased its guidance for the rest of the year. But, even after this move higher, the stock is trading at reasonable valuation levels considering its growth opportunities. As long as the company continues to deliver solid performance, there is still plenty of upside potential for investors.
Sodastream International Ltd (NASDAQ:SODA) is trying to revolutionize the carbonated drinks industry by allowing consumers to make their own carbonated beverages at home with a variety of different flavors. This provides many advantages over traditional soda consumption: more flexibility, lower costs, better environmental implications, and much healthier choices.
The company is competing against industry giants like The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP), which is no easy endeavor at all. To put things in perspective, Sodastream International Ltd (NASDAQ:SODA) spends in marketing in one year what Coca-Cola spends in only two days. Coca-Cola and PepsiCo are not only much stronger than SodaStream from a financial point of view; they also have other competitive advantages like gigantic distribution networks and unparalleled brand recognition.
Both The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) are facing slowing or even declining volume sales in the all-important U.S. carbonated drinks market, so these companies are trying to make up for this slowdown via international expansion and product innovation.
The Coca-Cola Company (NYSE:KO) delivered volume growth of 10% in Eurasia and Africa during 2012, while the Pacific region and Latin America experienced a 7% and 5% increase in volumes, respectively. While annual per capita consumption of Coca-Cola products in the U.S. is more than 400 servings, in China it’s currently just 38 servings, so emerging markets still offer plenty of room for volume expansion. The company is also leveraging its distribution system to introduce healthier alternatives like low calorie drinks and still beverages.
PepsiCo, Inc. (NYSE:PEP) has been smart in focusing its attention on healthy alternatives with its Good-For-You portfolio consisting of a combination of tasty and nutritious products like its Tropicana, Quaker, and Gatorade brands. In times when global consumers are becoming increasingly conscious about what they eat and drink, the company is positioning itself on the right side of the trend. Just like The Coca-Cola Company (NYSE:KO), PepsiCo is also relying in emerging markets for volume growth.
Both companies are safe and reliable alternatives with rock-solid fundamentals, but they will hardly deliver growth rates above high single digits over the next years. Size and market saturation are hard limitations to overcome.
Sodastream International Ltd (NASDAQ:SODA), on the other hand, is firing on all cylinders. The company reported a 28.5% annual increase in revenue during the last quarter, and earnings per share grew at an even faster 33.3% to $0.60, comfortably above analysts’ expectations of $0.57 per share. The Americas segment, where The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) are facing a noteworthy slowdown, showed a whopping increase of 55% in revenue.
Performance was strong across the board. Soda maker unit sales increased 22% in the quarter, carbonator refills grew 31%, and flavor sales were 18% higher versus the same quarter in the previous year. This shows that Sodastream International Ltd (NASDAQ:SODA) customers are not only buying the machines as a transitory fad and giving them a decorative role in the kitchen, they are actively consuming the products and buying more carbonators and flavors.
The company operates under the razor and blade mode. It sells the machines for a low cost and it makes most of its profitability with the consumables. The fact that customers are effectively using the machines and buying more consumables is quite reassuring when it comes to measuring the company’s acceptance among customers and financial prospects.
Even after the spike last week, Sodastream International Ltd (NASDAQ:SODA) is trading at reasonable levels for a growth company. Valuation doesn’t seem to be a big risk here since the company trades at a forward P/E of 19.6 versus 17.8 for Coke and 17.9 for Pepsi.
If Sodastream International Ltd (NASDAQ:SODA) continues gaining market share versus the soda giants, The Coca-Cola Company (NYSE:KO) or PepsiCo, Inc. (NYSE:PEP) could feel the need to launch their own home soda kits in order to put a limit to the company´s growth. This wouldn’t be an easy decision for the big players, it would almost certainly lead to cannibalization and conflicts with their bottlers, but it’s still a possibility to watch.
Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) is another potential competitor to consider. The company has recently filed a patent for a machine which, according to Bloomberg:“would make still, carbonated and sparkling beverages, as well as soda” and this has created some jitters among SodaStream investors.