Could Sodastream Face Issues Similar to those of Green Mountain? - Coca-Cola (NYSE:KO)

Individually packaged coffee provider Green Mountain Coffee 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 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 KO for its strong profit growth and reliable corporate governance.

Long Starbucks SBUX for its promising growth and cult-like following.

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