In this segment from Market Foolery, the cast turns their attention to SodaStream(NASDAQ: SODA)and its evolving business model. After encountering significant difficulties in the U.S. market, the company has staged a successful comeback with particular strength in Europe. The stock has been volatile for a few years now, but there appears to be a lasting turnaround under way.
A full transcript follows the video.
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This podcast was recorded on Feb. 15, 2017.
Mac Greer: Guys, let'sconclude here withSodaStream. This is a stockthat has been incredibly volatileover the last couple years. Andwe have some good news, and the stock up big onWednesday after reporting better-than-expected earnings. Jason,forget soda,it seems like the story here is sparkling water.
Jason Moser:Well,I liked our conversation earlier this morning: maybe this company, really, it all just boils down to the wrong name, right?
Moser:We'resitting here ragging on soda,it seems like, quarter in and quarter out. Maybe it needs to besomething like SeltzerStream or whatever. But, I think the real beauty to this business, inthe beginning, it's one that we've covered here in the Foolish universe for a while ...
Greer:Andwhat do they do, for people who don't know the company?
Moser:SodaStream basically sells you these machinesso that you can make seltzer or soda at home. You can carbonate your own water andmake your own sodas at home. Andon the surface, it sounds like a pretty neat idea,you don't have to go lugging around 12 packs of Diet Coke anymore, you can justdo it all right there at home.
Greer:I hate that idea. I'm sorry, I don't find that appealing at all on the surface.
Moser:[laughs] What,having the machine there?
Greer:Yeah!I don't drink soda, but I wouldn't want to make my own soda if I drank soda. That's like making your own toothpaste. Why? Why?
Moser:I don't disagree.
Greer:So,no, not on the surface,take it back.[laughs]
Moser:Being aDiet Coke guy,SodaStream, as a product, never attracted me from the beginning. Now,I will also say I made a big shift intrying to drink more seltzer. Buteven as that has occurred,I still have zero interest inhaving one of these SodaStreams on my counter at homebecause of the fact that you have to keep on replacing that CO2cartridge. It's just constant maintenance. Andthat's the crux of the question here. The beauty of the model has always been the razorblade nature -- the razorbeing the machine and the blades being the consumables that you use for the machine, the CO2cartridges, the flavors that you use for whatever you're wanting to drink. And for a long time,it seemed like maybe this had promise. Certainly has gained a lot of traction overseas. U.S.,I think, the U.S.market was viewed as a potential opportunityand that never really played out so much,and the stock got pummeled over the past few years because of that.
Interesting to see, they'remaking a little bit of a comeback here. Ifyou look at the numbers, there was about22.4%unit growth for the quarter, which translated into37% growth in revenue for those machines. So,they're actually selling machines,and they're getting some decent pricing on them. The growth in the consumables, which is the higher-margin, was less impressive, up 5%. This kind of getsback to the initial question that we always had with these things --it's one thing to give this thing as a gift to someone, where it's like, "Oh,that's a neat machine," orwhatever. But ultimately,at some point, does it not justend up collecting dust on your kitchen counter? And I think that's the hurdle that they still have to clear. This was a decent quarter,I'm not sure it necessarily indicates thatthey have cleared this hurdle and everything is better again.
Greer:David, looking at the stock chart for the last few years, it's gone from $40 up to around $70all the way down to $13,and now it's back around $50.
David Kretzmann:Yeah, across $50s. I think SodaStream,it's a great time to take a step back and see a lesson there, thatyou don't want to cut the future winner too early. SodaStream,I think the verdict is still outwhether or not it is a winner, butI would much rather hold a loser too long than sell a winner too early. In Rule Breakers, we sold SodaStreamright around $13 a year or two ago. Since then, the stock has comeroaring back almost four timesover the past year. So, I think there is something to be said forthe strategy of just buying and forgetting. Even if you have a loser,if it's a small percentage of yourportfolio, there is something to be said forjust letting that ride.
With SodaStream,it's interesting to see what has enabled this company to come back. I thinkpart of that is therepositioning of the product, focusing less on a soda alternative and more a soda replacement, or that sparkling wateraspect of the product. But the company always had apretty stable business in Europe. Europe,right now, the Western Europe business is still double the business thatSodaStream generates in the Americas. Right now, inAmerica, the household penetration -- so,the number of households with a SodaStream in it --is about 1.5%. In Europe,that number is over 10%. So, there is still a runway, if SodaStream can somehow crack that code here in the U.S. There is still a runway for growth there. Butin the meantime, that European business is still growing. I think there's still a lot to like here. The margins are really increasing. But I agree with J-Mo that you really want to see thoseconsumables, those repeat purchases, increasebecause I think that's really whatmatters most for long-term shareholders.
Greer:OK, youmentioned the reposition. I want to come up with a better name. Let's go around the horn. Right now,SodaStream, I think soda,for too many people, has a negative connotation now. So,what are you changing the name to?
Moser:FizzBot,I like that.
Greer:I like it. Jason?
Moser:I'll go with SeltzerStream,honestly. I feel like soda conveys this unhealthy vibe that we're seeing in the soda market. Soda is either a bad drink,or it's what George Costanza wants to name his baby onSeinfeld. So,skate where the puck is going, as they say. SeltzerStream.
Greer:I've got two, ready? WellStream, like, I'm feeling well.
Moser:Itsounds like you just got bought byWells Fargo. That's not in a good way.
Kretzmann:You have a backup.
Greer:Here's the winner: FunStream.
Kretzmann:It'slike a party or something.
Moser:That'slike a super squirter that your kids shoot each other with in the backyard.
Greer:Whodoesn't like fun?
Kretzmann:I feel like you would see that at Chuck E. Cheese or something.
Greer:Hey,it's brainstorming. There are no wrong ideas at this point.