Like the famous Nitro Cold Brew it serves up, Starbucks (SBUX) stock has been ice cold amid a lingering number of issues weighing down its stock.
Unionization efforts, the slowdown in China, store closures, and management uncertainties are just a number of reasons investors have cooled on the stock amid its painful slump.
Shares of Starbucks have already endured about a 40% decline from peak to trough. Now at $84 and change per share, SBUX trades at a reasonable 24.7 times trailing earnings multiple, given its longer-term growth potential.
Although there are no easy solutions to the coffee giant’s issues, I think Howard Schultz’s return will ultimately pay off, as the man looks to steer the ship back in the right direction amid incredibly choppy waters.
This isn’t the first time Schultz came out of retirement to right the course. For that reason, I remain incredibly bullish on Starbucks.
Schultz’s Buyback Halt Leaves Bad Taste
Schultz’ first big move was not met with applause; it was met with a big thumbs down from investors who ditched the stock on news of a pause in share repurchases.
I’ll admit I was not a fan of the news either. Stock buybacks only make sense with the stock as depressed as it is. Could the halt of buybacks be a sign that Schultz does not see SBUX stock as undervalued? Or is the man freeing up the financial flexibility to propel the company out of the gutter?
While it’s never encouraging to see a share buyback plan be paused, I think the response was overblown beyond proportion.
The company is in good hands with Schultz. Although the hunt for a full-time CEO is underway, I don’t expect the man will hand over the reins with the company in the shape it’s currently in.
Although a share buyback halt is never a good thing, at the very least, the dividend (yielding a bountiful 2.q%) remains intact and as healthy as ever. If there’s a man who can pull off a turnaround, it’s Schultz.
Freeing Cash to Make Investments
Starbucks spent around $12 billion over the last two fiscal years to repurchase its shares. With billions freed up, Schultz is ready to get to work, investing in areas where the firm has fallen short.
Employees aren’t happy, given their unionization efforts, and as a result, customers are not feeling great, as the price of their daily lattés grows to become even more expensive.
Starbucks is a powerful brand, and it has the pricing power to make it through the COVID-plagued inflationary storm. With billions to be put to work on various initiatives, the company may have enough to sweeten up the pot for baristas as it looks to fight off unions.
Still, I think the biggest growth initiative lies in automation, and that could be the key area of growth under this third era of Schultz. Indeed, automating a larger portion of the drink-making process could be where the real long-term opportunity lies.
The company’s innovative ordering app and Deep Brew technology seem to suggest that Starbucks is more of a technology company that just happens to serve up coffee and tea.
The company’s partnership with Amazon (AMZN) on its futuristic Starbucks-Amazon convenience store may be just the start of what to expect from the Starbucks of the future.
While it’s unlikely that baristas will be replaced by robots anytime soon, I think the firm’s dealings with automation-centric Amazon could bring forth a wave of autonomy that could help propel the stock out of the gutter.
Wall Street’s Take
According to TipRanks’ rating consensus, SBUX stock comes in as a Moderate Buy. Out of 23 analyst ratings, there are 13 Buy recommendations, and 10 Hold recommendations.
The average Starbucks price target is $114.05, implying 34.5% upside potential. Analyst price targets range from a low of $95 per share to a high of $135 per share.
Bottom Line on Starbucks Stock
It’s really hard to love what Starbucks is serving up these days. It’s been the perfect storm of headwinds, and the share buyback pause is just another reason to take a raincheck on the name as unionization attempts spook investors.
However, with Schultz already making moves to return the company to its former glory, I think there’s a lot of reason to give him the benefit of the doubt.
Also, let’s not forget about the long-term growth potential of the Chinese market. American brands are a big deal in China, and with its fast-growing middle class, Starbucks has an opportunity to flex its muscles.
The recent slowdown in China’s growth won’t last forever, and when it ends, perhaps Starbucks will be ready with even more compelling technologies.
As much as I hate stock buyback pauses, I have to say it was the right move. Schultz can do a lot to reinvent the company, and it’ll be interesting to see what initiatives the firm pursues over the next year.
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