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Although I’m a bigger fan of reacting to important fundamental inflection point news AFTER the fact rather than making decisions on far off in the future predictions, I do find it useful to crystallize my current leanings and thoughts. As always I reserve the right to change my mind at any time as new data-points are released. Here it goes:

1. After some volatility in January from macro headlines in Europe, SodaStream stock will sky higher in the first half of 2012 on spectacular quarterly financial results in February and May. The company’s European revenue will surprisingly be stable due to better management of the Nordic distributor acquisition, U.S. sales will continue to impress from the store roll-out, and the Walmart deal will be announced. How the company does in the second half of 2012 is less clear.

2. At some point in the year Green Mountain Coffee growth will slow down markedly as consumers grow weary of the brewer and K-Cup price increases. After the stock falls, Starbucks will acquire the company at a large premium.

3. Netflix net subscriber adds will continue to disappoint as customers flee and Starz video content disappears. The stock will get crushed low enough where Amazon, Microsoft, Google, or Apple (not Facebook, sorry Herb) will buy the company at a large premium.

4. U.S. economic growth will sputter. The Fed will panic once again and do QE3 through large-scale mortgage securities purchases.

5. Gamestop will underperform on the fading video-game console cycle and the lack of blockbuster titles in 2012 vs. the previous two years.

6. SINA Corporation Weibo (Chinese Twitter) user growth will plummet as new real-name government regulations take effect.

7. Social network casual gaming growth will decelerate and Zynga will suffer.  The "Curse of JR" will strike again for Electronic Arts as the company acquired social networking and casual gaming companies at "top of the cycle" prices and valuations.

8. Nintendo’s Wii U console and Sony’s Vita portable gaming handheld will both flop hard in the U.S. as casual and mobile gaming continues to shift to tablets, smart-phones, and iPod Touch platforms.

9. Google Places will not gain any traction. Google will wind up acquiring Yelp or TripAdvisor to compensate.

10. The Dallas Cowboys will show just enough flashes of brilliance to get my hopes up, then punch me in the gut by choking and failing miserably in the end. (I had to put one no-brainer on this list)

Proven Track Record of Blowing out Street Estimates the Last 4 Quarters

Source: Motley Fool (Link), Yahoo Finance

U.S. Store Rollout up More Than Triple-Digits Year-over-year to 9550 stores

Source: Ad Age full article link

1100 new Target stores, 1140 new Staples stores, 240 new Costco stores all rolled-out in the past month. The CEO was quoted on CNBC with Herb Greenberg that Walmart “is coming”. The CEO also said at J.P. Morgan conference on 11/30/11 “retailers like Trader Joes and Whole Foods.. You will start seeing things like that in the next year or so”

U.S. Store Growth led to Triple-Digit Sales Growth in Past and Likely the Future with Recent Store Add Acceleration of +45% q/q

New Un-penetrated Countries Will Drive Years of Future Growth
SodaStream household penetration in Sweden is over 25% with several European countries in the range of 17-25%. Household penetration in the U.S. is negligible. The company just launched in Japan (press release link) in October 2011 and announced it will launch in Brazil in Q1 2012 (press release link). Changes in the corporate presentation also strong imply an upcoming launch in India (my analysis link).

CEO quote from J.P. Morgan conference 11/30/11 on U.S. business trends: “bottom-line sales are triple digit growth in the U.S. Consumables are going through the roof. So we are very excited about the prospects of a strong holiday and strong long-term growth in the U.S.”

It’s a Great Product that Saves You a Ton of Money
I use my SodaStream to make me sparkling water and soda about 3 times a day. If you drink sparkling water, buying a Sodastream is a no-brainer. Read my article (link) on how you can get an amazing 16.6 cents per seltzer liter. It also helps save the environment with less plastic bottles wasted (link), costs less (link), and is better for you nutritionally (link).

The following are some reviews on the Sodastream model I own – the Genesis. You can read all 46 customer reviews here: (Bed Bath Beyond link)

Consumables Growth is Strong and Average Spend per U.S. Consumer Bodes Well for Future

U.S. consumable growth is stunning (look above at CO2 refills y/y etc.). The CEO said on 11/30/11 that average spending per U.S. consumer is $65/year much higher than world-wide average of $34/year, which bodes well for the future as the U.S. is only 30% of SodaStream’s revenue and growing at triple-digit annual rates.

Awesome Business Model and Barriers of Entry
Not only does SodaStream make money up-front selling soda-makers, the awesome part of the business model is the 80% gross margins (DB analyst estimate) it gets from CO2 refill exchange canister business.

Along with the 9550 stores in the U.S. that sell SodaStream sodamakers, 50% of them (4785 stores) participate in the CO2 refill exchange business. Stores love this as it drives repeat customer traffic. This distribution network is a huge barrier of entry for competitors as stores are unlikely to offer a second CO2 re-fill brand at their customer service desks. Moreover SodaStream has 5 million CO2 re-fill cylinders in circulation manufactured at $10 a piece, which represents a significant capital investment. The CO2 re-fill valve is also patented.

In developed markets where there is well-financed competition such as Sweden, SodaStream still dominates at over 80% market-share due to its brand, first-mover advantage, and distribution network.

Europe Revenue Risk

I believe the developed European market macro risk is over-stated. The developed markets in Europe (look above) are primarily 75%+ consumable revenue streams for SodaStream. Even if the macro situation worsens, it is high unlikely a family will cut down on $15 consumable CO2 re-fill every few months when in fact SodaStream saves them a ton of money vs. buying bottles. It’s a stretch to say any family will stop drinking sparkling water and go back to tap water to save that $15.

Europe growth has been overall strong, but even if it goes down to flat or single-digits, the triple digit growth in the U.S (already 30% of revenue) and new markets such as Japan and Brazil still give the company years of 20%+ growth runway.

Valuation and Short Interest
Most of Wall Street estimates for 2012 EPS are around $2.00 in USD earnings (Note Yahoo Finance estimates are in euros). Using the $2 number, the stock at today’s close of $29.85 is trading at 12.8Xs 2012 EPS ex-cash growing sales at 39% y/y in the last quarter.

Using the latest Nasdaq 11/15/11 short-sale data (link), short interest has increased 12% in the previous 2 weeks to 7,478,030 shares. That means roughly 54% of the float is short. High short interest to float numbers such as this have preceded massive short covering squeezes of 50-70% upward stock price moves in as little as 4 weeks (Examples: OCZ and BKS in the past 2 months).

Long-term annual targets

Summary
I believe SodaStream is the best “early innings” rollout growth story in the market. They make a great product that saves people money and is a proven household penetration winner world-wide. 

The company has blown out Wall Street estimates the last 4 quarters, accelerated U.S. store distribution 100%+ y/y +45% q/q, launched in Japan in October, and will launch in Brazil in Q1 2012. For all these reasons including the CEO repeatedly being quoted on Bloomberg, CNBC, and at Wall Street conferences about being “very excited about the strong holiday” I believe it’s highly likely SodaStream will post strong Q4 results.

Moreover the company will likely give strong 2012 guidance of at least 20% revenue growth and EPS growth of 25% as the CEO repeats those long-term annual growth targets on a monthly basis and in corporate presentations everywhere he goes.

Research Links
1. Official company Powerpoint presentation September 2011 (link)
2. J.P. Morgan conference 11/30/11 Powerpoint presentation (link)
3. My metrics financial model spreadsheet (link)

If you drink a lot of seltzer water, it is a no brainer to buy a SodaStream machine. Not only do you save the environment with less plastic bottles wasted, you also save a ton of money.

Here is how to get the best deal right now on a SodaStream machine. I would avoid the $125 model they have at Costco. It’s not worth the extra cost especially because it uses the bigger CO2 canister, which you can’t exchange at most places.

Stick with the $80 model sold now at most Staples and Target locations. You get the same functionality AND the ability to exchange the 60L CO2 canisters at Staples and Bed Bath & Beyond locations.

Use the “Where to Buy” function on the SodaStream web-site (Link) to find your local Staples and Target locations that have it and also find which Staples and Bed Bath & Beyond locations do the CO2 exchanges.

Although both Staples and Bed Bath & Beyond do the 60L CO2 exchanges for $15, I would recommend doing the exchanges at Bed Bath & Beyond because you can use the $5 coupon they mail out multiple times a year. Just sign up for the coupon mailing list at the store or on the Bed Bath & Beyond web-site.

For $10 per 60 liter CO2 exchange after the $5 coupon, you get an amazing 16.6c per seltzer liter. You also save the environment with no plastic bottles wasted. If you drink soda, you get the added benefit of better nutrition vs. normal brand-name sodas (Link).

So in summary for the best deal deal buy the $80 SodaStream model at Staples or Target and exchange your 60L CO2 canisters at Bed Bath & Beyond customer service desk for $10 after the $5 coupon.

Sodastream CEO presentation on September 8, 2011 Link

Notice on “Slide 39” during a presentation the SodaStream CEO gave in September 2011; there is nothing on Target, Staples, and Costco.

Using the “Where to Buy” feature on the SodaStream website (Link), I find the product is now available in about 1/2 of Costco locations (a rough sample estimate) and every Target and Staples store in my area (Note: this may not be the same across the country). 

A friend of mine in California said SodaStream was recently made available at his local Costco. My wife told me she saw SodaStream being demo-ed and sampled last weekend at our local Costco on the East Coast. I called that Costco up and an employee told me they had 100 units in stock.

I drove to my local Staples tonight and saw a huge end-of-aisle SodaStream display with 12 units right out in front when you walk in. It was right next to the Green Mountain Keurig display. I talked to an employee who told me he set the display up TODAY and they have one more box of inventory in the back. I estimate this Staples store got 20 units shipped-in.

I drove to my local Target and found the SodaStream display in the home kitchen area next to the microwaves and water filters. There was shelf space for 20 units. It looked like about 5 units were sold. I used the inventory checker with one of the units and found there was no more stock in the back. A Target employee told me it was a recent launch.

In previous SodaStream conference calls, management talked about a small 12 store test trial at Costco, which we now know had a large roll-out ramp up in the past week to more locations. Management also talked about testing at a big box mass-market discount retailer in the past year. Now we know that was Target with a massive roll-out this quarter. The Staples roll-out today is another positive surprise.

Costco has 432 stores in the U.S. Target has 1767 stores in the U.S. Staples has 1575 stores in the U.S.  I do not know the exact store roll-out numbers, but from a dozen zip code searches on the Sodastream site’s “Where to Buy” feature it looks pretty significant across the board.

If you do the shipped-in math of 20 units per added Target and Staples stores and 100 units for 1/2 of the Costco stores for $80-120 per unit, it is easy to see upside vs. the Wall Street estimate for U.S. SodaStream revenue this quarter. Please note this is U.S. revenue only. I have no visibility on their sales in Europe.

According to the WSJ, the EU is considering a private capital funded SPV (special purpose vehicle) leverage European sovereign debt insurance plan instead of the EFSF funded plan.

“One option would be to create a special purpose vehicle uniquely devoted to insuring investors against losses. The idea would be to draw in private investors and others, like sovereign wealth funds, to create a “bazooka” fund, the person said.” WSJ Link

This is very similar to the Geithner’s PPIP toxic mortgage security plan. The main problem is when we’re in world where every sell-side and buy-side investor is on earnings conference calls with banks and institutional funds telling them to lower European sovereign debt exposure, there is simply NO private capital demand for an SPV like this.

“Under PPIP, announced by Geithner in March 2009, the Treasury and private investors ultimately committed $14.7 billion in equity to funds run by eight money management teams. The Treasury agreed to provide $14.7 billion in low-cost loans to the funds” Bloomberg Link

Geithner promised a trillion dollar+ of bazooka fire-power raised from private capital for his PPIP SPV plan. In the end only $14.7 billion was raised.

-entering very difficult territory
-money managers fully invested because they have no choice due to severe career risk
-main driver of the economy is fiscal policy. It has been extremely stimulative, now turning negative, more restrictive. Europe – more austerity programs USA – early this year net negative. Disappointing economic trends due with that. Fiscal policy can’t become more stimulative onward. U.S., Japan, and Europe economies will disappoint into 2012
-80% of consumers are under-water and “spent out”. End of the month has nothing left. Can’t continue to accumulate debt
-at some point authorities will respond and try to stimulate again due to employment situation, may help stocks, maybe during election year
-another 5 years of a bear market for stocks
-fiat currency system, no discipline anchor, we do not reach low valuation extremes in 1930s. Even in 1970s, 1980s, trading 90% of book value. Book value is SP500 500, still a possibility, but don’t expect it to happen in next 2 years, more the middle of this decade
-next 2-3 years authorities will come with stimulus, SP500 1000-1100 downside, authorities will intervene to provide support, monetary ammunition. Very frustrating years 1000-1500 range in SP500. Lots of mine-fields. 2014-2016 major disaster coming and another wash-out
-defensive positions, trade medium term bull/bear side. no long-term investment policy. risk-free return is below inflation rate
-most of the decline in housing market behind us, but not to previous degree, so deleveraging won’t spiral down as before. Just very choppy, sloppy economy. Inflationary depression
-true consumer price inflation is 5-6%, shrinking economy in real-terms
-there will be more fiscal stimulus, only be able to do it in crisis environment. stock, asset, housing prices have to come down
-long-run not good for bonds, push interest rates up (but swing for 2 years), equities will beat bonds, but hang around in range for 2-3 years 1000-1500 swinging widely, middle of decade will get to close to lows in March 2009
-commodities are a China play. China is slowing down. Anecdotal evidence China is slowing down more than people think. Early next year they may have lee-way to support economy
-Gold is the one currency that reflects all these problems. Authorities will continue to do dumb things. Spiraling debasing of our fiat currency.  Emerging market will out-perform as inflation moderates in late or early next year
-QE2 was not necessary and counter-productive to the real economy. Created more inflation and higher prices of food and energy. Ate deeply into average consumer and will slow down economy further. Because of this, we won’t see QE3 quickly, but eventually see it because authorities will get desperate. They are looking for painless solution, but there is none. European austerity will fail and lead to recession
-We’ll see higher taxes for wealthy, cut some entitlements. Lower prosperity to average Western citizen, less spending power/consumption, less investment
-Good currencies: competitive economy, runs structural current account surpluses on continuing basis. Switzerland is a good example. Force out low-value add industries and go up the ladder to higher value-add. That’s how you create winners. Germany, Singapore same thing. Singapore, Norway, Swiss
-We all know Greece, Portugal, Ireland will default. Most likely Spain and possibly even Italy and Belgium will default. Longer they stay in union, most likely default will be, austerity = shrinking economy and rising debt, “cocktail for disaster”, some-one will say we had enough, we are better off if we leave the union. Greece should exit the euro in 1-2 years, devalue by 50%, one more year of problems, then economy will recover and tourism will boom
-Only one solution for the euro. Have to make euro a very weak currency to survive. Dramatically lower euro against the dollar. ECB against this, but will eventually lose the fight. ECB is only central bank trying to reduce balance sheet
-1/2 of U.S. money markets funding the peripheral European banks. Once this funding redeems, it’s over
-Euro will break apart
-New ECB president will hike interest rates in September to prove he’s more German than Italian, but it is completely unsustainable

Source Link

-markets will go through a rocky period in the next few months
-emerging economies are slowing
-Europe looks dangerous “double dip”
-I like to look forward not backwards
-PIIGS looking at negative growth going forward, bad for Germany
-see tremendous slowing in China. Tightening, first time housing prices rising less than mortgage rates. Will lead to a dramatic slow-down in construction
-Chinese will continue to tighten, economy will slow into next year, inflation is dangerous for them due to “social issues”
-U.S. dollar has been beaten down so much, “tremendous short position out there”, dollar will rise, valid into Fall of this year
-markets are always running ahead of the fundamentals
-EM will stimulate in 2012 and currencies will then strengthen
-commodity sector is most exposed to risk, particularly the base metals, dramatic inflow of money, so over-heated. Once we see slowing growth in China/EM, this sector will be hurt the most
-short copper, be defensive – household products, utilities, food/beverages, away from basic resources/energy
-in next 5-6 years, bonds look awful. Bernanke doing opposite of Volcker. Bernanke is putting more and more liquidity, negative real interest rates, debasing of currency, rising inflation, rising interest rates, rising bond yields
-however it could take 2-3 years before bond yields take off
-as soon as authorities see asset prices are declining, governments will do QE3 or QE4. It will be global in nature
Link

More Felix Zulauf articles: Link

A bit of background here. The market leader in SLC (single-level cell) based SSD drives is STEC. SLC technology has historically been more reliable than MLC (multi-level cell), but more expensive. However thanks to recent improvements, MLC has become reliable enough where companies are now willing to use it due to its lower cost. The market leader in affordable MLC SSD drives is OCZ.

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EMC put out a press release today titled: EMC Outlines Strategy to Accelerate Flash Adoption [Link]. It is very bullish on the future adoption of enterprise SSDs across their storage system products. However the line that caught my eye was this one:

EMC plans to design, test and qualify MLC-based SSDs for enterprise-class applications and incorporate them into EMC systems later this year, making enterprise flash storage more affordable.”

Then I remembered what OCZ said on their 5/3/11 earnings conference call last week [Link]:

We have recently seen a sole source design in with our Deneva series to well known enterprise class storage system OEM, who we expect to ramp to mass production quantities in our fourth quarter. And though we are still determining potential revenue for this client, we’re excited in our ability to win and compete with this business.”

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The number of coincidences here is interesting:

1) Is EMC a well known enterprise class storage system OEM? Yes.

2) Is OCZ Deneva an affordable enterprise MLC-based SSD? Yes.

3) Does the EMC timing of “later this year” match up with OCZ Q4 timing mentioned on the conference call for this win? Yes.

I want to emphasize I have no hard information if OCZ has won any business from EMC. I’m just an investor connecting the dots from EMC’s press release today and OCZ’s earnings conference call last week; but given all the multiple data-points and with the timing matching up perfectly, it sure makes you think.

Disclosure: The author is long OCZ at time of writing.

There is a misperception that OCZ is a consumer oriented PC hardware company due to its past history. 90% of OCZ revenue is SSD.

Only 7% of SSD revenue is consumer and the rest of SSD revenue is high performance/server and data center/cloud computing enterprise.

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The Deneva enterprise SSD and Vertex 3 server SSD products are the key drivers of 2011 growth.

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“This growing market awareness and recognition has translated into solid business momentum. As every segment of our SSD business grew rapidly this quarter. In addition to our first Tier-1 OEM that is now shipping in volume, we have continued to achieve a number of design wins.

For example we received orders recently from a large Asia Pacific based telecom service provider for our Deneva series of SSDs and they’re expecting this client to start limited deployment this year, and to ramp considerably over the next 24 months.

We have recently received initial orders from our Deneva series with a new high performance computing OEM who we expect to roll out to a major cloud computing service provider over the next two quarters.

We have recently seen a sole source design in with our Deneva series to well known enterprise class storage system OEM, who we expect to ramp to mass production quantities in our fourth quarter. And though we are still determining potential revenue for this client, we’re excited in our ability to win and compete with this business.

We recently qualified our Deneva SSDs from Palo Alto networks, a provider of next generation enterprise firewalls, and we’re in the final stages of qualification and pricing with a large data center for our VeloDrive. Should this business come to fruition, it could represent a significant portion of our PCIe-based SSD sales through fiscal ’13.” – OCZ Q4 2011 conference call on 5/3/11 [Link]

New enterprise design wins mentioned on the conference call:

1) Tier 1 OEM shipping in volume
2) large Asia Pacific based telecom service provider (Devena enterprise SSD)
3) new high performance computing OEM rolling out to major cloud computing service provider over next two quarters
4) sole source design win (Devena enterprise SSD) to well known enterprise class storage system OEM
5) design win with Palo Alto networks for their next generation enterprise firewalls (Devena enterprise SSD)
6) large data center (enterprise PCIe VeloDrive)

OCZ clearly states design wins from #2 to #6 are NOT included in current guidance.

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At Friday’s close of $6.77, OCZ is trading at 0.9 CY2011 EV/sales growing at 99.5% y/y (SSD revenue +380% y/y). STEC is currently trading at 2.2Xs CY2011 EV/sales and really isn’t growing much if you take account the EMC inventory burn-off catch up.

OCZ has a similar SSD revenue growth ramp with Fusion-io in both absolute revenue numbers and y/y growth. Fusion-io is an enterprise SSD company which was named the #1 venture capital funded technology company in 2010 by the Wall Street Journal. Fusion-io’s products are higher end, higher ASP, and higher margin. However if it comes public at the rumored 10Xs sales valuation or any multiple significantly higher than OCZ/STEC, the relative valuation discrepancy will be stunning.

OCZ in the last quarter had a non-GAAP net profit of $1M ex-a $1.8 million loss associated with the discontinued memory business (there will be no more memory business after this quarter). The ramp of the enterprise SSD design wins in 2011 will help OCZ scale into its long-term model of 28-32% gross margins and 13-17% operating margins stated in their earnings press release.

Source of first 2 slides is the excellent OCZ presentation here: Link

Disclosure: The author is long OCZ at time of writing.