The razor-blade model in the beverage industry, in which most of the profits are made on the complementary products that are sold to returning customers, is proving to be sustainable. This practice is the driving force behind Sodastream International Ltd (NASDAQ:SODA), which continues to rally in the stock market and keeps gaining more confidence from investors. Will this company continue to rally? Is it time to consider this Israeli company as an investment? What are its disadvantages?
In the first quarter of 2013, the company not only beat the expectations of analysts, it also updated its outlook so that Sodastream International Ltd (NASDAQ:SODA) plans to reach annual sales of $1 billion by 2016. If the company continues to meet or exceed the expectations of analysts, the sharp rise in the stock could be sustained.
The company has also reached new collaborations that will help Sodastream International Ltd (NASDAQ:SODA) sustain its high growth in revenue: the company announced it reached an agreement with Ocean Spray to mix its juice blends with Sodastream International Ltd (NASDAQ:SODA)’s carbonation systems; Sodastream International Ltd (NASDAQ:SODA) will also have its dispensers in Samsung’s refrigerators. These are all steps in the right direction for growth in revenue.
First quarter of 2013 was better than expected
Sodastream International Ltd (NASDAQ:SODA)’s first quarter showed 34% growth in revenue (y-o-y). This was better than many had anticipated. On the other hand, it’s worth noticing that the company’s operating profitability declined from 13% in Q1 2012 to 11.5% in Q1 2013. Moreover, the company’s free cash flow in the first quarter was negative. But its free cash flow in 2012 was positive. Its debt-to-equity ratio is very low at 2.8%, and its total cash is almost $50 million; so SodaStream doesn’t have a cash flow problem or trouble raising money if needed.
The sharpest growth in revenue was in the U.S at nearly 89%. The U.S is likely to be the main focus of the company that will keep its growth in the coming years. According to one estimate, the company has reached less than 1% of U.S households, which means there is more than enough room for more growth.
In terms of products, the sharpest growth in revenue was in consumable products (including flavors and gas tanks), which grew by 37% while the soda makers’ revenue increased by 28%.
This company’s razor-blade-model retailing is very effective in maintaining customer loyalty. Moreover, since customers who bought the soda maker’s products are “captive clients” as they have already spent a good deal of coin on SodaStream, a different company won’t be able to persuade those customers to switch. But will SodaStream’s competitors react?