For many, McDonald’s (NYSE:MCD) is more than just a stalwart in the fast-food industry. Rather, it’s a cultural icon, perhaps best symbolized when the brand launched in the former Soviet Union in January 1990 to rapturous embrace. However, in recent years, the Golden Arches lost considerable relevance. Fortunately, by focusing on the needs of the emerging customer demographic, McDonald’s may enjoy a second wind. I am bullish on MCD stock for a potential transformation.
MCD Stock Should Rise on Gen Z Pivot
Fundamentally, McDonald’s could have a game-changer on its hands with its new CosMc’s chain. Focused on a drive-thru business model that emphasizes convenience, CosMc’s will take aim at established competitors, namely Starbucks (NASDAQ:SBUX). However, the enthusiasm for MCD stock doesn’t just revolve around a fresh endeavor. Rather, management is earnestly focused on understanding the emerging customer: members of Generation Z.
First, the basics. As TipRanks reporter Shrilekha Pethe mentioned, McDonald’s implemented a strategic business move to break into the afternoon beverage market via a quick-service restaurant chain. The first CosMc’s opened recently in Bolingbrook, Illinois, while a handful of other locations are planned in the coming months. By the end of next year, the fast-food juggernaut plans to open 10 CosMc’s locations across the Dallas-Fort Worth and San Antonio metro areas.
Moreover, I’m in full agreement with TipRanks contributor Joey Frenette when he stated, “The new concept has the potential to be a profound success.” Just to build on this speculation, the enthusiasm mostly stems from Gen Z’s penchant for personalization.
For years, multiple resources reported that this consumer cohort gravitates toward retail establishments that offer customization options. Set to be the largest and most ethnically diverse generation, individual expression rates highly among Gen Z members. So far, Starbucks has dominated the personalization angle, but McDonald’s seeks to disrupt its rival’s market position.
Indeed, it’s well-positioned for disruption because of its two identities. Moving forward, the “old school” crowd can still enjoy their traditional McDonald’s offerings. However, with CosMc’s, the company could relatively easily siphon away Starbucks customers. As a result, MCD stock should be on your radar.
Matching Starbucks Pound for Pound
Right off the get-go, even casual observers of the new CosMc’s brand will realize a conspicuous distinction: the spinoff is a drive-thru-only establishment. And that’s not a coincidence but a carefully planned effort by McDonald’s to match Starbucks pound for pound.
Of course, a convenience angle exists, which will cater to busy, upwardly mobile young professionals. Beyond that point, though, the Golden Arches recognized that in recent years, the famous coffeeshop began aggressively embracing drive-thrus and mobile ordering services. Further, one industry report points out that 70% of Starbucks’ domestic locations offer a drive-thru option.
In other words, McDonald’s is providing a clear alternative to the Starbucks addict. That’s positive for MCD stock. And it gets even better. As a Fox Business report pointed out, CosMc’s offers the customization that Gen Z craves but at a lower price.
Fundamentally, that right there will likely be the true catalyst for MCD stock as it relates to CosMc’s boost. Yes, there’s something to be said about brand loyalty. However, that loyalty will be put to the test as financial pressures build. While encouraging data on disinflation recently materialized, it’s also fair to point out that inflation remains elevated against historical norms.
When you factor in other headwinds, such as mass layoffs, people – especially younger folks – will gravitate toward the lower-cost option. That’s McDonald’s forte, which should augur quite well for MCD stock.
Compelling Financials May Help McDonald’s
At the moment, the one factor that might dissuade investors from MCD stock is its valuation. Trading hands at 25.3x trailing-year earnings, it’s not exactly cheap. For instance, the restaurant sector prints a price-earnings ratio of 20.32x. However, it might be deceptive to just look at this ratio without considering CosMc’s tailwind.
In all fairness, no one knows how well CosMc’s will perform. Nevertheless, the data presents an encouraging framework. The spinoff is convenient, cheap, and customization-friendly. It enjoys the support (obviously) of the McDonald’s brand. Plus, the Golden Arches never had a snobbery effect, so the company could launch CosMc’s locations across a broad spectrum.
Given the realistic potential for – dare I say it, remarkable – success, MCD stock deserves a higher multiple. So, in my opinion, it’s undervalued relative to the future business it will bring in (or take away from Starbucks).
Is MCD Stock a Buy, According to Analysts?
Turning to Wall Street, MCD stock has a Strong Buy consensus rating based on 23 Buys, six Holds, and zero Sell ratings. The average MCD stock price target is $314.00 implying 8.7% upside potential.
The Takeaway: MCD Stock Gets a Well-Deserved Sequel
McDonald’s iconic status has waned, but CosMc’s, a new Gen Z-focused drive-thru chain offering Starbucks-like customization at lower prices, could revitalize the company. Understanding this emerging customer demographic and capitalizing on their desire for personalization is key to the potential rise of MCD stock. Despite a seemingly high valuation, CosMc’s convenience, affordability, and brand backing suggest MCD is undervalued and well-positioned to disrupt Starbucks.
