Is Sodastream International Ltd (SODA) Heading to $100?

This is the fourth in a series of articles that chronicle the rise in Sodastream International Ltd (NASDAQ:SODA)’s stock price as it has risen to $40, $50, $60, and now $70 per share during the past year. Since it took less than a month for shares of SodaStream to rise from $60 to $70 after releasing yet another quarter of record results, it is important to take a moment to consider the reasons behind the stock’s market beating performance noted in the chart below:

SODA data by YCharts

The market is no longer in denial

Last summer, I made the bold statement that “the market was in denial” with respect to Sodastream International Ltd (NASDAQ:SODA) and its growth opportunities. More recently, the market has finally started to catch on; this week, Barclays analyst David Kaplan took a look at the growth trajectory of SodaStream and raised his price target from $55 to $100. This massive upgrade and Kaplan’s well constructed bullish arguments for 2013 and 2014 propelled the stock 8% higher to a new 52-week high.

While I’d argue that nothing has really changed in the investment thesis over the past month, the market is finally starting to take notice of Sodastream International Ltd (NASDAQ:SODA)’s tremendous potential. In particular, management’s projection that the company will more than double its revenue and reach $1 billion by 2016 has seemed to provide investors with a better definition of the growth opportunity that has existed for years.

Is the stock still a buy?

The recent series of analyst upgrades and corresponding share price gains have certainly shown the market’s evolving understanding of SodaStream’s investment thesis. As usual, the big question on everyone’s mind after a run like SodaStream has had is: is the stock still a buy? To begin this conversation, here’s a look at the trend of a few of Sodastream International Ltd (NASDAQ:SODA)’s valuation metrics that this series of articles has tracked:

While SodaStream shares may not be the screaming buy that they were last August, it is hard to argue that a company with a forward P/E of 22 and a PEG of 1.1 is overvalued, especially a company with Sodastream International Ltd (NASDAQ:SODA)’s long-term growth potential.

Growth prospects remain strong

Analysts project that SodaStream will grow earnings by 25% per year over the next five years (source: Yahoo! Finance), which corresponds to the top line growth rates required to reach $1 billion in revenue by 2016. As discussed in more detail in the previous article in this series, this growth is expected to come from a variety of sources, including increased penetration in the United States, expansion in emerging markets, new innovations in soda makers and unique products like SodaCaps, and through the creation of new partnerships. These growth pillars are central to the investment thesis and remain unchanged.

Risks to be considered

It is easy to not spend much time considering risks when analyzing a company as undervalued as SodaStream was a year ago. However, now that Sodastream International Ltd (NASDAQ:SODA)’s share price has begun to catch up with the true value of the business, the margin of safety for investors increasingly depends on an assessment of the risks facing the company’s ongoing growth.

In this regard, many of the comparisons made between SodaStream and Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) have some validity. After a few years of dominance by Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), competition in the single-cup home brewing market has erupted. However, it is important to realize a couple of things that differ between home soda making and coffee brewing.

First, home-brewed coffee was an established market that Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) disrupted; so, an entrenched base of appliance makers and coffee bean producers needed to adapt and compete to stay relevant. Second, Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) has still been a highly successful investment; the company has a market capitalization of over $11 billion and is expected to continue growing at over 20% per year.

In contrast, Sodastream International Ltd (NASDAQ:SODA) has essentially created the home soda making market. While this clearly will attract attention from larger soda makers such as The Coca-Cola Company (NYSE:KO) , the fact of the matter is that Coca-Cola is not in the business of selling appliances and does not have relationships with many of the distributors (ranging from Williams-Sonoma, Inc. (NYSE:WSM) to Macy’s, Inc. (NYSE:M)) that sell SodaStream and other kitchen appliances.

Moreover, no competitor has the distribution network in place to handle the unique requirements of carbonation tanks needed for soda making; handling these tanks in transit and providing customers with the ability to exchange empty tanks creates a very different set of logistical issues than both Coca-Cola and kitchen appliance manufacturers such as Cuisinart currently deal with in the consumer market.

Despite barriers to entry and a first-mover advantage, The Coca-Cola Company (NYSE:KO) and other soda makers have tremendous resources at their disposal. Coca-Cola invested $100 million in the development of the Coke Freestyle machine, and could certainly adapt the Freestyle for sale to consumers. Any developments on this front are certainly worth monitoring.

Additionally, there is no proprietary platform (such as the K-Cup) that prevents competitors from marketing soda syrups for use in Sodastream International Ltd (NASDAQ:SODA) machines. While The Coca-Cola Company (NYSE:KO) and the other major soda makers appear inclined to preserve their relationships with bottlers and not pursue the sale of syrup directly to consumers, there is nothing stopping other companies from selling syrups.

Three mitigating factors currently exist for this potential competitive threat. First, SodaStream has a full array of flavors that both taste good (although I’ll admit some are better than others) and are healthier than the brand name competition. As a result, competitors would need to find a way to differentiate through price, taste, or health in order to make an impact. Second, SodaStream has been successful thus far in partnering (rather than competing) with brand names such as Kool Aid, Country Time, and Ocean Spray. A continuation of this trend may remove the most likely competitors in the direct-to-consumer syrup market. Third, the sale of syrups is just one part of Sodastream International Ltd (NASDAQ:SODA)’s business; if the home soda making market grows as expected and SodaStream is the leader in appliance, “carbonator” (gas tanks), and accessory sales, losing market share in the sale of syrups won’t be a game changer for the company.

What to look for going forward

The sale of consumables (syrups and gas refills) remains a key indicator of how much consumers are really using SodaStream’s products. Last quarter, sales in the United States of both syrups and gas refills both increased by over 100% over the prior year. Continued strong growth will be evidence that the investment thesis continues to play out and that users are truly adopting Sodastream International Ltd (NASDAQ:SODA). However, a sudden decline in the sale of these consumables should be considered a red flag worthy of further research.

Now that SodaStream’s stock is priced more appropriately for its anticipated growth, it will be equally important to track the company’s performance on both the top and bottom lines in comparison to the expectations laid out by management and the market. At this point, the share price still isn’t reflective of a company that will grow earnings 25% per year for the next five years. So, if continued strong performance indicates that 25% (or greater) growth is likely, it is not unreasonable to expect SodaStream to reach a share price of $100 or more in the near term.

In short, a reasonable valuation and strong growth continue to make Sodastream International Ltd (NASDAQ:SODA) a buy.

Brian Shaw owns shares of Coca-Cola and SodaStream. The Motley Fool recommends The Coca-Cola Company (NYSE:KO), Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), and SodaStream. The Motley Fool owns shares of Sodastream International Ltd (NASDAQ:SODA).

The article Is SodaStream Heading to $100? originally appeared on Fool.com.

Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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