SodaStream Fizzles

NEW YORK (TheStreet) -- SodaStream (SODA) had a very bad day yesterday. Shares fell nearly 26% on very heavy volume, as the company reported disappointing preliminary results for 2013. The crime committed by the company was revenue growth of 29% year over year, and adjusted net income of $52.5 million.

Unfortunately, investors were expecting much more, at least on the earnings side of the equation. The revenue miss was actually very small, just $5 million on a forecast of $567 million, which is less than 1 percent. The earnings miss was bigger; the consensus was expecting adjusted earnings of $65.4 million. The fourth quarter was evidently the problem, as the holiday retail season did not go as expected.

Investors' reaction to the negative news was fast and furious, as it often is in these cases. Something is clearly wrong when a company is valued at more than $1.04 billion at the start of the trading day, and $770 million at the close. So much for market efficiency.

SODA ChartSODA data by YCharts


There's a great investment lesson in all of this, a lesson that is often overlooked until it's too late. High expectations leave little room for error. When the results don't meet those expectations, the damage can be horrifying. Perhaps that's quite obvious, but that doesn't stop investors from continuing to make the same mistakes. They keep putting bets on companies with high expected growth, some of which may be fads. And they expect that growth to continue uninterrupted in perpetuity.

Here's a company that is essentially selling kits to make homemade soda. SodaStream's revenue has more than quintupled since 2009. It now generates more a half a billion dollars a year selling a gadget that lets you make your own soda on demand. That, to me, is quite remarkable. I am the first to admit that I've see this as just a fad: a machine that will ultimately collect dust, abandoned in the back of a closet, forgotten next to the bread maker that's never been used. But I actually give SodaStream a lot of credit. They have seized an opportunity that few knew existed, and have done so very profitably.

The problem is that investors have simply expected too much.


I don't know what the future is for SodaStream, but the company previously stated expectations of hitting the $ 1 billion mark in revenue by 2016. I'm not sure that's possible. Admittedly, I'm surprised they reached the $500 million sales mark.

I've tasted the product, and it's very good. I also like the fact that the company sells syrups that are sweetened with cane sugar, which is making a comeback because it tastes better than corn syrup-sweetened drinks, and also because some consider sugar the healthier of the two sweeteners. But I can pick up a case of sugar-sweetened Mexican Coca-Cola (KO), in glass bottles, no less, or a 12 pack of Pepsi (PEP) Throwback, also made with sugar, at the grocery store. I just don't see the benefit of making it at home. Perhaps I'm just lazy. But I'm not alone.

It will still be interesting to see where the stock heads from here. Now trading at about 15 times earnings, it's gotten a lot cheaper.  I've sometimes taken positions in former growth darlings which were punished beyond what seemed reasonable (eBay (EBAY) for example), but I am not interested here.

I can't help but think that the problems during the fourth quarter may be at least partially due to waning consumer excitement about the product.


At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Jonathan Heller, CFA,CFP® is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

  Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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