SodaStream: A Great Short, Once Every Store Is Fully Stocked

There has been a lot of speculation lately about the health of the IPO market and whether it is signaling that the bull market that has seen the S&P 500 index double since early 2009 is in its late stages. Whether it be hot U.S. technology and internet IPOs (watch LinkedIn today as an example) or wannabes in China and India, there is no doubt that many of these new issues are overheated. One of the more interesting ones in my view is SodaStream (SODA), the maker of carbonation systems used to make your own soda and flavored water at home. If you have perused a Bed, Bath, and Beyond or Williams Sonoma lately, you have probably seen their display. What once would have been reserved for the pages of SkyMall in your airline’s seat compartment has now apparently gone mainstream in the U.S. and the company is pushing into new markets all across the globe. You can now buy a SodaStream soda maker at 40,000 retail outlets in 40 countries.

Not surprisingly, SodaStream stock has been roaring since its late 2010 IPO. After reporting strong first quarter earnings, SODA soared 23% or $10, to close at $54 per share on Wednesday. That huge move higher gave the company a market valuation of over $1 billion. Crazy? Probably, but let’s not underestimate how many retail locations globally SodaStream may be able to get its product stocked in. That is why I say this might be a great short opportunity, but not quite yet. As long as SodaStream is signing up new retailers, they will likely be able to post some impressive sales numbers simply from initial inventory stocking.

However, the long-term viability of the business model will depend on how many units those retailers are able to sell, and how many buyers actually continue to use the product regularly (SodaStream gets 50% of its revenue from consumables — CO2 refills and flavor mixes). Getting soda makers out the door of your manufacturing factory is one thing, building a loyal customer base for years to come is quite another. How many kitchen appliances get used once or twice and then find gather dust in the back of the pantry? Can’t you picture a SodaStream home soda maker in such a situation?

So how many soda makers are consumers actually buying? Not that many, even though the company reported unit sales of 592,000 for the first quarter of 2011. With 40,000 retail outlets peddling the product, that rate of sales equates to about 1 soda maker sold per week, per retail location. At that sell-through rate, it is easy to see that constant restocking really won’t be required. Given that this product has a ways to go before I’m convinced it will become a mainstay in consumer kitchens worldwide, I will be monitoring the situation closely. As SodaStream expands into new countries and signs on new retail distributors, I have no doubt they can grow sales substantially initially, but the thing to watch is how many potential retail outlets there are, and how fast they penetrate those markets. Once the SodaStream product line has found its way onto most retail shelves, it will have a much tougher time performing well and keeping that shelf space.

With a market value already exceeding $1 billion (for comparison’s sake, the third largest soda company in the world, Dr Pepper Snapple, is worth about $9 billion), SodaStream’s stock could easily reach nosebleed territory and make for a great short once the initial stocking sales momentum calms down. I don’t know if I would call this a fad (are they really that popular to begin with?) but I think in a year or two from now the fizz will have flattened tremendously. Time will tell.

Full Disclosure: No positions in the stocks mentioned at the time of writing, but positions may change at any time