I have a background in marketing. So it’s impossible for me to ignore the loyalty that Starbucks (NASDAQ:SBUX) receives from its customers. It shows up in my social media feed for sure. But I also notice that, even in the small-ish area I live in, Starbucks continues to expand, or at least refurbish, its 35,000-store U.S. footprint.
But is that a good enough reason to buy the stock? That’s the question I’ll be exploring in this article.
Can SBUX Stock Grow Into its Valuation?
I’ve had Starbucks on my watch list for some time and I still don’t have a good read. The stock is up 8% since the middle of July. However, SBUX stock is down 24% in 2022. And with a price-to-earnings (P/E) ratio of just under 25, Starbucks is still trading at a premium valuation.
That’s the bad news. But the potential for good news exists as well. Specifically, the company is expected to grow revenue at a high single-digit rate in the next five years. And the outlook for earnings is slightly better. The company is projecting earnings growth of just over 10% in the next five years.
If that’s true, it would buck the existing trend of higher year-over-year (YOY) revenues but declining YOY earnings. But how much of that growth will come from the United States? That’s where one significant question emerges.
Starbucks May Have a China Problem
To help offset the company’s U.S. saturation, Starbucks continues to grow its business in China. On the surface, it seems like a sound strategy. China does represent Starbucks largest market outside the U.S. with nearly 6,000 locations.
However, for a number of reasons – some of which are not entirely clear, the Chinese economy is showing signs of weakening. And in its most recent quarter, Starbucks reported that comparable-store sales in the country were down 44%.
And, as the controversy with Luckin Coffee (OTCMKTS:LKNCY) reminded investors, coffee is not a part of Chinese culture in the same way that it is in the United States. So, it remains to be seen if the company can build the same brand loyalty that it gets in the United States.
That makes this an uphill climb for Starbucks. And that brings up another concern for investors considering a position in SBUX stock.
Who's Steering the Ship?
SBUX stock got an initial bounce when former CEO Howard Schulz returned for a third tour of duty in March 2022. However, the stock was not spared from the market sell-off and is basically where it was in March.
In addition to navigating a complicated economic picture, Schulz is dealing with a small, but growing unionization movement within the company. Currently, only a small fraction of Starbucks locations have voted to unionize, but the trend is accelerating. And it strikes at the heart of the very culture that Schulz created when he first transformed the company to a national chain.
And since Schulz describes himself as “interim CEO” it suggests that he isn’t planning on making this a long-term arrangement. Yet it doesn’t appear that there’s a clear successor in line.
Is SBUX Stock a Buy?
The analysts tracked by MarketBeat give Starbucks a consensus price target of $103.32 which gives the stock a 16.9% upside. That puts it in the Moderate Buy category. And since my colleague Thomas Hughes wrote about SBUX stock in early August, the stock has managed to push past resistance at its 150-day moving average. That puts the 200-day SMA as the next target.
As Hughes noted, if it pushes past that level and climbs above $90, things may start to percolate for the stock. As summer comes to an end, we’re entering the season where Starbucks brings back some of its seasonal delights. That’s potentially a good sign for earnings. However, for the time being I like the company's products more than its stock.
