Sodastream International Ltd (SODA): Investment or Fad?

Remember the good old days when you could drop a quarter into your local vending machine and enjoy a Coke and a smile?  Sadly, inflation has driven carbonated beverage prices to at least a buck, and far more in certain venues.  But Israel-based Sodastream International Ltd (NASDAQ:SODA) wants to bring back the days of cheap carbonated Coke-like products, with their popular at-home fountain Soda Maker kits.  Sodastream sells an innovative line of Soda Maker Units that give consumers the ability to duplicate their favorite soft drinks, at home, for about $0.25 per drink.

Sodastream’s growth has been very strong, with sales up nearly 50% year to date in 2012.  Since 2009 the company has sold over 8 million Soda Maker Units, paving the ground for future CO2 and Flavor refill sales.  Investors have been rewarded with over a 20% gain in the last year, but short-sellers have piled into the stock, betting that Sodastream’s business model is unsustainable and the product is just a fad.

Sodastream bulls hope their product will eliminate much of Coke and Pepsi grocery sales, while creating a new at-home beverage segment that will be fueled by future sales of Sodastream’s  flavor and CO2 refill products.  The company’s next earnings report will highlight how many new Soda Maker Units were sold during the crucial Q4 holiday period.  With retail partners including Wal-Mart and Target, along with a strong media push, analysts expect that over 1.2 million new units were sold in the quarter.  Adding to the buzz of the brand, Sodastream’s first Super Bowl ad was rejected due to network allegiance to behemoths Coke and Pepsi.  The snub created positive PR for the banned ad with over 4 million Youtube views.  This positive PR and media momentum has many bulls expecting a blowout quarter and higher guidance for 2013.

Sodastream is currently valued at around $1 billion, which may seem like a lot until compared to rivals Coke ($187 billion) or Pepsi ($112 billion).  The case can be made that one–or both–beverage giants would shell out a premium to acquire Sodastream, removing the nuisance of intrusion into their high-volume grocery segments. The Coca-Cola Company (NYSE:KO) has over $28 billion in cash parked on their balance sheet to invest in a growth strategy such as Sodastream.  Sodastream flavors could be converted into existing Coke products, giving customers unlimited customization options at home, similar to the Coke Freestyle in quick service restaurants.   But Coke has not shown interest in making their product available to be created at home, citing inconsistency and loss of brand identity.  It seems that Coke is content to let Sodastream take grocery market share in the near-term.