Here’s How Starbucks Stock Could Grow To $190

[Note: Starbucks’ fiscal year 2024 will be ending in September]

Starbucks (NASDAQ: SBUX) is adding a new beverage The Pecan Crunch Oatmilk latte to its lineup, and it has been garnering good reviews. What makes this drink different from other seasonal favorites? This beverage boasts a pecan pie-inspired flavor, evoking the nostalgia of Thanksgiving. It aims to bridge the gap between the everyday routines of the fall season and the festive indulgences of the upcoming holiday season. This beverage has the potential to become a landmark product for the company, illustrating the impact a single, game-changing offering can have on a brand’s trajectory. As exemplified by Apple (NASDAQ: AAPL), whose iconic products such as the iPhone, iPad, and Apple Watch, etc, have cultivated a devoted following and solidified the company’s market position. Starbucks can also replicate this success, establishing a signature offering that resonates with consumers, fosters brand loyalty, and drives business growth.

Could Starbucks stock grow to $190 in the next few years from the roughly $95 level it is at currently? Does this sound a bit ridiculous? Consider this – Starbucks’ stock was trading at around $126 per share, almost 1.3x the current value in July 2021. Below we examine a scenario where SBUX stock doubles from current levels, considering three key metrics: revenues, net margins, and price-to-earnings multiple.

Overall, the performance of SBUX stock versus the index over the last 3-year period has been lackluster. Returns for the stock were 11% in 2021, -13% in 2022, and -1% in 2023. Meaning it underperformed the S&P500 index in 2021 and 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could SBUX face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?  We have revised our Starbucks’ Valuation to $97 per share, based on a $3.58 expected EPS and a 27.1x P/E multiple for the fiscal year 2024 – almost in line with the current market price.

Starbucks Revenues and Margins Could Strengthen In Coming Years 

Starbucks’ Revenues grew from $29 billion in 2021 to $36 billion in 2023 as the company’s strength in digital orders helped it rebound quickly from the pandemic setback. The company saw strength in both U.S. business and growth in the International segment during this period. However, the company’s sales have been taking a hit in FY 2024 so far. The company’s total sales, inclusive of new stores, were down 1% year-over-year (y-o-y) to $9.1 billion in the third quarter (ended June 30), while its global comparable sales declined 3%. It should be noted that the U.S. comparable transactions were down 6%, taking the blame for a large chunk of this decline. Inflationary pressures also played a big role in the company’s weak results this year.

Starbucks’ net margins (net income, or profits after expenses and taxes, calculated as a percent of revenues) fell from levels of over 14% in 2021 to about 10% in 2022 amid increasing operating costs and increased promotional activities. Nevertheless, the company’s net margins grew to about 11.5% in 2023 due to sales growth and in-store operational efficiencies. Its Q3 net margins came in at 11.6% (down 90 basis points y-o-y), and earnings per share (EPS) dropped 6% y-o-y to $0.93. The markets are likely betting that Starbucks’ margins could eventually recover and then expand to historical levels as the company has its turnaround plans in order. 

Why?

Starbucks is the world’s largest coffee chain. It has nearly 39,500 stores worldwide, including over 18,000 stores in North America, and continues to open new ones rapidly. A total of 526 net new stores were opened in the company’s fiscal third quarter, and the company sees plenty of opportunities for expansion in the future. The company expects to have 55,000 Starbucks locations across 100 different markets by the year 2030 – with 75% of this expansion outside the U.S. market. Almost 18% of the company’s stores are located in China, making it the most important geography internationally.

The coffee business is lucrative as it lends itself to repeat purchases, which puts Starbucks in a strong position. The coffee products offered by Starbucks involve no significant technological disruptions, and the industry’s slow pace of progress should help Starbucks make it through the long term. Starbucks is a company with several competitive advantages. These include its brand, a successful rewards program, a wide range of in-store experiences, and ready-to-drink beverages in stores. Starbucks reported 33.8 million 90-day active rewards members in the U.S. as of June 30, an increase of 7% y-o-y (also up 2% quarter-over-quarter from Q2 2024). Consumers are also willing to pay for the products they deem premium, based on Starbucks’ high gross margin (~67%) which gives the business room to absorb higher input costs while still being profitable. Starbucks has consistently been able to raise prices throughout the inflationary environment in the U.S. – and most loyal customers still come in despite higher pricing and inflationary pressures – demonstrating the strength of its business.

Former Chipotle CEO Brian Niccol took over as Starbucks’ new CEO earlier this month and has highlighted four main areas for improvement in his turnaround plan. His initial plan is to concentrate on its U.S. business. The focus is on providing the baristas with the tools they need to consistently make great drinks in a personal way. Next, he mentioned delivering high-quality food and drinks on time, every time. Third, he wants Starbucks to go back to being a community coffee house by elevating the customer experience. And finally, he wants Starbucks to go back to telling its story. The company owns its coffee farm in Costa Rica, which serves as its base for research and innovation in coffee. However, Niccol noted that the company rarely discusses it.

All said, high expectations are already banked in post-Niccol’s appointment, with the SBUX stock now trading at a price-to-earnings (P/E) ratio of ~26x. However, we believe that with a forward P/E ratio of 24.2x based on 2025 EPS estimates of $3.95, the stock is still trading below where it has often traded over the past few years (P/E in the range of ~high 20s).

How Does This Impact Starbucks’ Valuation? 

If we assume revenue growth of roughly 1.26x between 2023 and 2027 with margins growing from 11.5% in 2023 to about 21% in 2026, a roughly 2x increase, this would mean that its net income could grow from about $4.1 billion in 2023 ($3.58 per share) to about $9.5 billion (about 8.29 per share). Good times make it easier to imagine even better times – and when that happens, investors could begin to see Starbucks in a more favorable light, re-assessing the company’s recovery path. For example, if Starbucks’ investors assign a multiple of 23x following its stronger growth trajectory, this could translate into a stock price of about $190 per share by the end of 2027, assuming earnings of $8.29 per share.

What about the time horizon for this positive-return scenario? While our example illustrates this for a 2027 timeline, in practice, it won’t make much difference whether it takes three years or four.  If the turnaround takes hold, with Starbucks improving its key metrics, we could see meaningful gains in the stock. This is a huge business and Starbucks has valuable know-how in a competitive market. Our analysis suggests that a win will be at hand – it just may not be quick and may require patience. 

Of course, there are possibilities that the company could have a hard time training its huge worker base in new types of equipment or the company might misidentify the branding. Overall, it could be a bumpy ride for a while. There is certainly a case to be made for sizable long-term gains from Starbucks stock, but the Trefis High Quality (HQ) Portfolio could be right up your alley if consistent outperformance is at the top of your list.

It is helpful to see how its peers stack up. SBUX Peers shows how Starbucks’ stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 9/23/2024
[2] Cumulative total returns since the end of 2016