Green Mountain Coffee Roasters‘ (NYSE:GMCR) stock has nearly doubled in the last six months, helped by strong quarterly earnings announced back in November. The general verdict on the Street seems to be that the company has proved its skeptics wrong.
The recently announced Starbucks‘ (NASDAQ:SBUX) earnings provide a glimpse of the challenges that lie ahead for Green Mountain. Starbucks stated that it sold 150,000 Verismo units in the quarter ending December 30. Although the number may only be a fraction of Keurig’s unit sales, it still is pretty impressive for a newly launched product. Moreover, sales could pick up as the company’s distribution network continues to expand and as customers get used to the idea of buying brewers other than those of Keurig. Green Mountain sold a total of 2 million brewers through its Keurig brand in the previous quarter. 
As soon as Starbucks announced its decision to launch a new single-cup brewer last year, Green Mountain’s stock plummeted as investors feared the company might not be able to compete against the financial muscle of Starbucks. However, we have always stressed that Keurig brewers enjoy a high degree of compatibility with third party and private-label K-cup brands, a factor which is likely to keep the company at the top position. So, we don’t expect any other company to overtake Keurig, at least not in the near term.
On the other hand, continuing to top the single-cup brewer market does not warrant a license to double the stock price. Rising competition can slow down the growth rate which can ultimately impact the profit generating ability of the company.
Although Green Mountain’s previous results were impressive, the market seems to have downplayed the fact that the effect of patent expiration hardly played a role in the previous quarter. Two of the company’s patents expired in September which paved the way for other competitors and private labels to introduce their own, lower-priced K-Cups without having any sort of obligation to pay royalties to Green Mountain.
Another area of concern is the performance of the more profitable Vue brewers. Its sales halved to $9.6 million from $20 million in the third quarter.  The Vue brewer was introduced in the first half of 2012 and is positioned as a premium brewer for making specialty drinks such as lattes or Americanos. The product is priced much higher than the traditional brewers. The original Keurig K-Cup brewers were generally sold at prices close to its cost in order to boost the brewer adoption rate. The brewers themselves were hardly profitable.
To summarize, there are still some issues that Green Mountain needs to address before you can really be confident about how sustainable the current set of numbers are.
We have a price of $29.40 for Green Mountain Coffee Roasters, which is about 30% below the current market price.Notes: