Starbucks Stock Can 2X Now

[Note: Starbucks’ fiscal year 2024 ended September 2024]

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 2x in the next few years from the roughly $97 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. We examine a scenario in this note where SBUX stock doubles from current levels, considering three key metrics: revenues, net margins, and price-to-earnings multiple.

Does SBUX stock look attractive now?

Overall, the performance of SBUX stock with respect to 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. 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.

Snapshot of Current Scenario

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%. Starbucks faced significant external pressures, including eroding consumer confidence, elevated inflation, and disappointing growth in China, which comprises almost one-fifth of the company’s business.

How Can An Iconic Product Improve Sales?

A flagship product can potentially boost foot traffic, enhancing comparable sales opportunities. During the recent third quarter ended June, Starbucks’ global comparable store sales declined by 3%, primarily driven by a 2% decline in the U.S. and a 7% decline internationally. However, when compared to a similar period before the pandemic (Q3 2019) – when Starbucks was thriving thanks to exponential growth in China, innovation in products, and global coffee alliances with the likes of Nestlé – the company’s comparable sales grew 6%, driven by a 7% growth in the Americas and 5% growth in China and Asia Pacific.

An uptick in foot traffic can revitalize customer loyalty for Starbucks, bolstered by its successful rewards program. Starbucks Rewards launched over a decade and a half ago – reported 33.8 million 90-day active rewards members in the U.S. as of June 30, an increase of 7% year-over-year (also up 2% quarter-over-quarter from Q2 2024). Nonetheless, comparative analysis reveals an opportunity for further growth. For perspective, SBUX’s peer Chipotle (NYSE: CMG) rewards program, introduced in Q1 2019, has surpassed Starbucks’ membership numbers, with 40 million members as of Q2 2024.

Starbucks is the world’s largest coffee chain. It boasts an extensive network of nearly 39,500 global stores, with over 18,000 located in North America. The company’s growth momentum remains strong, with 526 net new store openings in Q3 (of which 141 were in North America). For FY 2024, the company has planned a total of 580 new stores added, with renovations planned in more than 800 stores in North America. This strategic expansion is poised to fuel revenue growth, solidifying Starbucks’ market position and driving future profitability.

Margins Could Improve Going Forward

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. At present, the coffee king’s Q3 2024 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. Despite near-term challenges, we remain upbeat on Starbucks’ prospects, anticipating a margin rebound to historical levels driven by the company’s transformative turnaround strategy. CEO Brian Niccol outlined a US-focused turnaround plan centered on four key areas: barista empowerment for consistent quality, timely delivery of high-quality offerings, revitalizing the community coffee house experience, and highlighting Starbucks’ unique story, including its Costa Rican coffee farm and innovation hub.

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.

Impact on Starbucks’ Valuation? 

The Pecan Crunch latte’s financial impact will be directly tied to its availability. While seasonal releases yield quarterly gains, a permanent menu addition would likely foster sustained revenue growth.

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 revenues and margins, 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. 

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.