Will SodaStream Pop or Fizzle Out?

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SodaStream International (NAS: SODA) took investors on a roller-coaster ride in more ways than one this year. After climbing from a 2010 closing price of $31.58 to nearly $80 this summer, the bottom dropped out from under the at-home soda maker faster than you can say "there go my sunglasses." And just like a roller coaster, SodaStream brought rattled investors back to where they started, trading at about $31.00 today.

Shareholders who held on for the ride may be feeling a little queasy after getting rocked around like that. Let's take a look at why they may or may not want to take another lap.

Buy
SodaStream's numbers are looking pretty sweet these days.

Growth: The soda maker has been around for years, but a talented executive team and the funding from last year's IPO have finally pushed it into the public eye. The company has achieved a 20% market share in Sweden and has a growing number of retailers hawking its wares in the U.S. now, including Costco, (NAS: COST) , Staples (NAS: SPLS) , and Target. After first selling through retailers like Williams-Sonoma and Bed Bath & Beyond, the soda maker seems to be well on its way to finding shelf space in its natural home -- supermarkets.

Valuation: Unlike most growth stocks, SodaStream is available at a very reasonable P/E of 23.56. The stock got hammered in August when management failed to raise guidance following a blowout earnings report, and has lost more than half its value since then. Though a slight correction may have been in order, if the company had actually done worse, as Fool Chris Baines explains, no one would have been disappointed by the failure to raise guidance.

It's hard to argue with the numbers. With a PEG ratio of just 0.61, if you believe the growth opportunities are real, then the price looks pretty good.

Sell
The SodaStream bears seem to have two major reasons for betting that the pop sensation will fizzle out.

It's a fad: With over half of SodaStream's shares sold short, it's clear many investors think DIY soda is just a passing fad. Bullmarket.com said in November, "We continue to largely believe that Sodastream is a fad, and don't think that over the long term most consumers, particularly in the U.S., want to make their own soda." A further indication of that view came when the stock failed to move up after the company's Q3 earnings report killed analyst expectations.

Competition: Ironically, the other camp of SodaStream bears focuses around the competitive threat coming from Primo Water's (NAS: PRMW) Flavorstation. SodaStream's stock dove 10% on Oct. 26 when CNBC's Herb Greenberg said that Flavorstation could put a cloud over SodaStream's future.

Aside from the contradictory nature of the arguments, I think both reasons are flawed on their own. In my opinion, the kitchen-counter carbonation machine is a concept long overdue. It fits well with the foodie culture and environmental consciousness that's gone mainstream over the past decade, and I think it offers plenty of benefits at a reasonable price. The most popular SodaStream machine scores a 3.9 out of five on Amazon.com's review system, the same rating the most commonly scored Green Mountain Coffee Roasters (NAS: GMCR) Keurig coffeemaker gets. The Keurig has been nothing short of a juggernaut for Green Mountain. Since the coffee roaster acquired the single-cup maker in June 2006, Green Mountain's stock has rocketed from about $3 to over $110 this summer.

As for Primo Water, that company has shown repeatedly that it's not ready for prime time. The maker of exchangeable multigallon water containers has posted two disappointing earnings reports in a row, bungled its Flavorstation rollout, and now finds itself the target of a class action lawsuit alleging it defrauded shareholders. The stock is down more than 80% from its high earlier this year.

Even if Primo gets its act together, I don't think that's necessarily a bad thing for SodaStream. There are plenty of smaller players in the soft drink industry who would love to break Coca-Cola (NYS: KO) and Pepsi's (NYS: PEP) duopoly, and I think another company selling a home-based soda machine will only help develop that market and increase awareness. I can foresee co-branding deals with smaller soft drink makers like Jones Soda or Boylan's, the way Keurig K-Cups are now available from Starbucks and Dunkin' Donuts. SodaStream CEO Dan Birnbaum doesn't appear concerned, either, noting the company has achieved 80% market share in European countries despite competition.

Hold
Here's one reason to sit on the sidelines after this year's rough ride.

The Green Mountain curse: The maker of the Keurig coffee brewer had been one of the great growth stories of the past decade, but the hot stock cooled off after concerns about patent expirations and flawed accounting cut its price in half. Like Netflix before it, Green Mountain's collapse has some growth investors running scared, especially from a stock like SodaStream, whose business model bears a close resemblance to the Keurig maker's.

Growth stocks tend to track together for no good reason; just another of the many irrationalities of the market. With today's current volatility and uncertainty, investors have headed toward the safety of dividend stocks, ignoring riskier plays like small-cap growth companies. This rationale can only hold out so long, though. If SodaStream continues to put up big earnings numbers, its stock will eventually follow.

My call
Buy. I'm not fooled by the SodaStream bears, and the market will eventually wake up from the Green Mountain hangover. For SodaStream, the opportunities abound and the price is right. I'm thinking 2012 will be a much smoother ride for SodaStream and other hidden gem growth stocks.

There is another one of these hidden jewels that has caught my eye. I expect it will be one of the darling stocks of 2012, handsomely rewarding shareholders who invest now. The stock is being referred to as the Costco of Latin America. Just like SodaStream has achieved massive market share abroad, we at the Fool think this retailer will take its sector by storm as it dominates the Latin American landscape. You can learn more about this stock in our special free report: The Motley Fool's Top Stock for 2012. It's free, but not forever. You can click here to access it now. Enjoy, and Fool on!

At the time this article was published Fool contributorJeremy Bowmanowns shares of SodaStream International, but no other companies mentioned in this article. The Motley Fool owns shares of Costco Wholesale and Coca-Cola.Motley Fool newsletter serviceshave recommended buying shares of Coca-Cola, Netflix, Staples, SodaStream International, Starbucks, Green Mountain Coffee Roasters, Costco Wholesale, Williams-Sonoma, PepsiCo, Bed Bath & Beyond, and Amazon.com.Motley Fool newsletter serviceshave recommended creating a diagonal call position in PepsiCo.Motley Fool newsletter serviceshave recommended creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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