I’ve identified a handful of companies that use the so-called “razor and blades” model to deliver predictable, long-term results. Some are just starting, some have a sustained record of success. But all of them are part of my retirement portfolio, which means I’m hoping to hold them forever. Go here to see how I’m doing. Will you learn more from my successes or my inevitable mistakes?
The disposable razor was invented in the early 1900’s, but it was King Camp Gillette’s competitors that were first willing to lose money on the razors to make money on the blades years later, when Gillette lost patent protection. Over a century later this strategy is assigned to any company that counts on sustained revenue generated by something required to use the item purchased. And while in many cases the company still makes plenty of money on the “razor,” it’s still the “blade” that, as an investor, holds the key.
Bubbles, syrup, and the power of convenience
Consumption of soda in the U.S has been on a slow decline for several years. And while international expansion remains a decent opportunity for companies like The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP), I like Sodastream International Ltd (NASDAQ:SODA)’s potential far more. As Amazon.com, Inc. (NASDAQ:AMZN) has shown us, the ease of being able to pick out items and have them delivered to your door is a powerful advantage, and I see a similar benefit in the convenience of home-based systems like Sodastream International Ltd (NASDAQ:SODA).
And while it’s not the same as clicking your mouse and opening a box the next day, not having to lug heavy bottles of soda home from the store, or take up room in the pantry, the convenience of adding syrup and bubbles to your own filtered water at home is a powerful draw for many people (myself included).
The company has grown significantly since it went public, indicating plenty of people see the value. And while the share price has really gone up this year, the company still looks to be relatively affordable, if you know what to look for:
SODA Forward PE Ratio data by YCharts
Valuation metrics require context. Shares of Sodastream International Ltd (NASDAQ:SODA) are up over 50% YTD. But as you can see above, its forward PE valuation is well within the range of several other fast-growing, profitable companies. But as with any investment, there is risk to consider.
Beware the gorilla
The two biggest risks to Sodastream International Ltd (NASDAQ:SODA) are related to the giants in the soda biz. First, consumer adoption. The company must continue to attract customers away from other brands, and it may be a challenge to attract those that are loyal to a certain beverage. On the other end of the market, those that buy store-brand sodas may balk at spending $79 or more on a machine to take home. Simply put, the company has to continue to attract consumers in the middle.
Additionally, there is a chance that, if the company continues to take market share, The Coca-Cola Company (NYSE:KO), PepsiCo, Inc. (NYSE:PEP) or Dr Pepper Snapple Group Inc. (NYSE:DPS) will either enter the home game or attempt to acquire the company. While I think the latter is a more likely scenario, the former is a consideration. For either to become a reality, there will need to be a lot of growth first. I’m betting that there will be.
Robot surgeons and the revenue streams they produce
The da Vinci surgical system has been used by surgeons for 14 years in over 2,000 sites around the world, and unlike many “razor and blade” business models, Intuitive Surgical, Inc. (NASDAQ:ISRG) makes money on the robot and on the additional items needed to perform each procedure. Factor in a nearly 25% sustained annual growth rate, and there is a lot to like.
MAKO Surgical Corp. (NASDAQ:MAKO)’s Rio surgical robot could do for arthroscopic surgery what the da Vinci has done for procedures in soft tissues and organs. But where Intuitive Surgical, Inc. (NASDAQ:ISRG) has systems in more than 2,000 sites, MAKO Surgical Corp. (NASDAQ:MAKO) has less than 200 total machines installed. And where Intuitive Surgical, Inc. (NASDAQ:ISRG) is very profitable (and growing that profit at a strong clip,) MAKO Surgical Corp. (NASDAQ:MAKO) is burning through cash very quickly as it builds the necessary scale to become profitable, on the back of the recurring revenues generated by each procedure.
MAKO Surgical Corp. (NASDAQ:MAKO) has faced some serious headwinds over the past year as sales growth of the Rio slowed — actually going backward at one point — and then stabilized. The good news is machine adoption, and the rate of procedures is steadily increasing, a sign of physician and patient adoption. And while the company is still probably a year (or more) away from reaching profitability, I’m willing to take the chance that when it happens, the profits will be significant.
It’s still surgery, and that means risk
Intuitive Surgical, Inc. (NASDAQ:ISRG) has faced a series of lawsuits recently, and while this is a serious concern, more than a decade of solid and safe performance is somewhat reassuring that this is not a significant danger to patients or investors. For MAKO Surgical Corp. (NASDAQ:MAKO), there have been some competitive challenges, but it has managed to overcome that recently, including acquiring competing IP to further strengthen the technology. Frankly the biggest risk I see is dilution if the company runs out of cash before profitability and chooses to use a secondary option to generate cash. It’s really a matter of how quickly the company can influence buyers to acquire systems, and how quickly surgeons start using them.
Foolish bottom line
I’ve taken a position in all three of these companies, counting on their ability to attract customers that see the value of both the “blades” and the “razors.” Only time will tell how it pays off for my portfolio, but I encourage you to explore all three and see how they would fit in your portfolio mix.
The article A Regular Fool’s Retirement Portfolio: Razors, Bubbles and Robot Doctors originally appeared on Fool.com.
Jason Hall owns shares of MAKO Surgical , Intuitive Surgical, and SodaStream. The Motley Fool recommends Intuitive Surgical, MAKO Surgical , and SodaStream. The Motley Fool owns shares of Intuitive Surgical and SodaStream. Jason 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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