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?
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?
The competitors
The company’s leading competitors in the U.S are The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP). These companies haven’t had as good of a quarter as SodaStream has: The Coca-Cola Company (NYSE:KO)’s revenue slipped in the first quarter of 2013 by 1%, while PepsiCo, Inc. (NYSE:PEP)’s revenue grew by 1.2%.
Moreover, Coca-Cola and PepsiCo’s operating profitability slightly declined in Q1 2013 to reach 22% and 13.2%, respectively. In the U.S, these companies haven’t performed well in the first quarter: Coca Cola (NYSE:KO)’s unit case volume slightly rose by 1%; revenue slipped by 1% and operating income sharply fell by 24%.
PepsiCo America beverages volume fell by 5%, while the company’s operating profit grew by 4% due to “favorable effective net pricing and productivity gains.” Nonetheless, comparing these two well-established companies to a growing company such as SodaStream is unfair. Moreover, for now, SodaStream has yet to put much of a dent in the revenue of these companies.
At the same time, I can’t imagine these companies will stand idly by while SodaStream increases its market share in the U.S. I guess it eventually means one of two scenarios: one of the companies or other big soft- drink company will try to buy SodaStream; or these companies will bring a full-on attack at SodaStream’s core business by coming up with a similar product. These two scenarios will lead to very different outcomes for SodaStream and investors should be taken into account.
The main drawbacks that SodaStream may be facing are:
- The company is putting all its eggs in one basket with its soda maker. This could put SodaStream at risk if its product and service faces strong competition from the big companies. In comparison, Coca-Cola and PepsiCo have a much more diversified line of products.
- SodaStream’s growth was mainly in the U.S in the first quarter of 2013. The Americas accounted for 41% of its revenue. In the same quarter of 2012, it was 29%. This ratio isn’t high compared with other beverage companies: Coca-Cola’s revenue from North America account for 44% of its total revenue; PepsiCo’s revenue from the region were 41% of total revenue. But if SodaStream’s growth in the U.S will persist, the America’s share out of revenue could become much higher; this could mean the company will be less diversified in terms of geography.
The Foolish bottom line
I think SodaStream is a great company with lots of room to grow; it’s financially stable, and it has a great business model that will serve the company well. On the other hand, I’m a bit worried about its diversification. Finally, the company is currently outperforming the big soft-drink companies; however, once it reaches a high enough volume, it might need to face stronger competition from the big boys that could impede its progress.
The article Will SodaStream Continue Fizzing? originally appeared on Fool.com.
Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream. Lior is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
