Market Overview

Could Sodastream Face Issues Similar to those of Green Mountain?

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Individually packaged coffee provider Green Mountain Coffee (NASDAQ: GMCR) has tumbled more than 70% since October 17 last year, when hedge fund manager David Einhorn spoke negatively about the company.

Einhorn explained that its market is “limited” and implied that competitors could develop knock-off K-Cups. Could similar arguments apply to in-home soda provider Sodastream (NASDAQ: SODA)?

Sodastream produces in-home soda makers and supplies, including soda bottles and SodaMix syrup. While Green Mountain, creator of Keurig coffee brewers and supplies, has declined around 43% year to date, Sodastream has increased around 1%.

Green Mountain's year to date did, however, include its chairman losing his seat because he had to sell a massive amount of Green Mountain's stock after a margin call. But margin call aside— as another in-home drink company, Sodastream seems to face similar business forces to Green Mountain.

With a similar business model to Green Mountain, could Sodastream experience a similar price decline and price-to-earnings multiple contraction?

Perhaps Sodastream, like Green Mountain, will face a limited market and threats of knock-offs. Sodastream's market could be limited by Pepsi and Coke drinkers who do not want to settle for a different soda.

Green Mountain's patent on its K-Cups is set to run out later this year. This could be an open invitation to knock-off K-Cup producers, but knock off in-home soda syrups could arise even sooner. Increased competition could deprive Sodastream of the attractive margins it now gets on syrup. Of those who are not tied to name-brand Coke and Pepsi, consumers may soon buy Sodastream-brand soda makers only to purchase dirt cheap syrup from other companies.

ACTION ITEMS:

Bullish:
Traders who believe that consumers will forgo drinks like Starbucks coffee and Coke for cheaper in-home options, but won't buy knock-off K-Cups and SodaMix might want to consider the following trades:
  • Long Green Mountain Coffee in anticipation of renewed long term growth expectations and loyal K-Cup buyers.
  • Long Sodastream expecting a growing in-home soda making market and homemade soda consumers who gravitate toward Sodastram brand syrups.
Bearish:
Traders who believe that consumers won't settle for drinks other than name-brands like Coke and Starkbucks and that those who do want in-home alternatives will flock to cheaper knock-off K-Cups and SodaMix may consider alternative positions:
  • Short SodaStream in anticipation of limited market potential, maturation of soda maker sales and competition from knock-off syrups.
  • Long Coke (NYSE: KO) for its strong profit growth and reliable corporate governance.
  • Long Starbucks (NASDAQ: SBUX) for its promising growth and cult-like following.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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