Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
"SodaStream (SODA) fell on Monday after the company's Super Bowl ad was sent back to the company for being too provocative towards its competitors. SodaStream does have a backup ad which means that this news really isn't that important, yet the reaction it created is noteworthy to say the least. This is a volatile stock that is always ready and willing to shift direction abruptly, and with it being near 52-week highs might it be setting you up for disaster with a downside trend in sight?
SodaStream: The Bull & Bear Case
SodaStream appears to be a stock that's trend is more important than its fundamentals. For some reason, its trend is connected to that of Netflix (NFLX) and Green Mountain Coffee Roasters (GMCR). Back in 2011 SodaStream was at all-time highs and was fundamentally expensive. Therefore, it fell hard with both NFLX and GMCR in the second half of 2011 and has also traded higher with those same stocks in recent months.
The reason that SODA is such a trendy stock is because it's a controversial company. SodaStream is not overvalued by any stretch of the imagination, trading with a trailing P/E ratio of 25.80 but posting revenue growth of 34% over the last year and 110% earnings growth in the same period. For a company growing at this level you'd think it would be a much more expensive stock, yet for the better part of the last year it has continued to trade flat or in a tight range.
With 100% earnings growth and a P/E ratio near 25, common sense suggests that short sellers would keep their distance. However, 55.50% of SodaStream's float was short as of January 15, which is simply incredible. The reason is because it has traded higher by 45% in the last two months, and because it is so controversial. Here are a few reasons that investors believe the company is overrated and overvalued.
1) The company's do-it-yourself home soda products could be a fad.
2) There are major concerns that its European success will not translate into the Americas.
3) After consumers buy the soda maker they have to continue purchasing CO2 cartridges. Some worry that people will buy SodaStream machines or give as gifts but will not continue to buy the cartridges.
4) The company relies on a "razor and blade" business model, soda maker and cartridges. These are typically ineffective as long-term business strategies and some worry that consumers will find the model to be a hassle.
While there are many who feel strongly about the above reasons for SodaStream's failure (about 55% of its float), there are many who feel the complete opposite. Here are some reasons to be long.
1) 61% revenue growth in the Americas last quarter exceeds global revenue growth. This suggests that fears of slowed American adoption are inaccurate.
2) Most of the company's sales come from Europe; America has barely been scratched in terms of revenue.
3) The company just recently began selling its products in Wal-Mart (WMT) (among other retailers). Longs believe Wal-Mart will add significant sales to the company's top-line.
4) SodaStream products are much healthier than conventional Coke (KO) or PepsiCo (PEP) soda with more "green" ingredients.
As you can see, there are strong arguments for both sides of the trade. However, the fact of the matter is that revenue and earnings are growing while the valuation had remained the same for the better part of last year. The most significant question now with the stock trading at new 52-week highs is if it's time to buy? There's no question that it's still fundamentally cheap but with it being such a trendy stock you almost have to look back on history as a gauge of what to expect.
Earnings Sets the Trend
SodaStream does not announce earnings for another month, but has a long history of trending either higher or lower in anticipation of earnings and then trading in the opposite direction after earnings are announced. The last two months has been the first time since February of last year that SODA has traded largely higher before earnings. Last year it traded 60% higher in the three months before earnings, but then fell from $44 to $34 in the two weeks after the quarter was announced. This was in part due to strong earnings being priced into the stock and was also due to weaker than expected results. Therefore, with SODA now following a similar trend, we must wonder if it will repeat the same history.
With such an overwhelming presence of short sellers it won't take much for SODA to reverse its trend. It's trading at its highest levels since July 2011 and with any signs of weakness, margin pressure, or slowed growth in the Americas, this stock could retrace back to the low $40's. However, with a strong quarter, we could see a massive short covering and a stock that breaks into a new range. Last year, at this time, the stock failed to perform, but I think this time will be different. I have looked at both the long and short sides of the argument, and to me, the short side seems more speculative than the longs.
Most longs base their outlook on fundamental growth and known data, while shorts speculate that the company's products are a fad and that it will not achieve success in America. However, 60% revenue growth in the Americas says otherwise, and I see no proof that SodaStream is not a company on the rise that can't maintain growth. Furthermore, Wal-Mart could be the difference maker, and with earnings significantly stronger than last year, I say to watch for SODA to continue its trend and to breakthrough into a new range of trading. Of course there are risks, but with its valuation and its growth, I think the chances of a short covering and new highs is much more likely than the stock trading lower at this point in time."