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Starbucks Stock has Cooled Off, Now Just the Right Temperature
Stock Analysis & Ideas

Starbucks Stock has Cooled Off, Now Just the Right Temperature

Shares of coffee giant Starbucks (SBUX) have now lost over 43% of their value from peak to trough. Sometimes negative momentum just keeps building on itself.

Though Starbucks has had its fair share of issues, its long-term growth profile should come with a premium price tag. After such a nasty tumble, Starbucks stock now trades at a mere 19.2 times trailing earnings, with a 2.72% dividend yield, making it an intriguing value play with an underrated growth profile that should become better-appreciated again once the market comes to its senses.

For now, growth is out of style, but after such a drastic valuation reset over at Starbucks, you could classify shares as both growth and value. With CEO Howard Schultz ready to turn the ship around, I would not want to throw in the towel on the cherished brand here. I am staying bullish on Starbucks stock.

The Never-Ending List of Problems Cools Off SBUX

It’s been the perfect storm of headwinds for Starbucks. From union troubles to CEO uncertainties and the slowdown in China, it certainly seems like anything that could have gone wrong already has.

Recently, Starbucks clocked in some less-than-stellar second-quarter results. Sales came in at $7.6 billion, with some pretty reasonable 12% comps in the U.S. region. Undoubtedly, the company has come a long way since the days of pandemic lockdowns. China was the prominent sore spot for the quarter. As a result, sales fell a whopping 23% due to strict COVID-19 restrictions.

China’s zero-COVID policy has been severe. However, such restrictions will lift in due time, and some pent-up demand for various Starbucks products could work their way into a future quarterly result. While it’s tough to tell when China will tighten restrictions next, I do think the worst is now in the rear-view mirror.

Recently, residents of Shanghai were granted a bit more freedom to go grocery shopping. In due time, lockdowns should ease, and things could return to normal, leaving consumers with a lot of extra cash to spend on discretionaries.

Look for Starbucks to Pursue Margin-Enhancing Initiatives

Margins were relatively muted for Starbucks’ latest quarter. Labor pressures and the impact of inflation worked their way into the numbers.

Undoubtedly, such headwinds have been familiar to a lot of companies. Though there are no easy solutions to higher prices, I think that Starbucks has a strong enough brand to dodge and weave past such pricing pressures over the coming 18 months. Starbucks is a legendary brand, and with that comes a great deal of pricing power.

As rate hikes propel the U.S. into a recession, the company may wish to hold off on significant price increases. In any case, Howard Schultz has a challenging task on his hands as he looks to duke it out against the unions, which are making things harder than they have to be for the coffee chain.

In prior pieces, I highlighted the likelihood that Starbucks would pursue greater autonomy in response to unions and upward pressure on wages.

Undoubtedly, Starbucks has already been hard at work on various labor-automating technologies. The company’s Deep Brew technology and Mastrena 2.0 machines help make the lives of its baristas easier. AI-driven Deep Brew automates tasks such as inventory management, while Mastrena is one of the smartest espresso machines out there. Could more tech reduce the workload of baristas and eventually replace them altogether?

Not anytime soon, but such innovations should at least help offset recent wage pressures while pushing Starbucks further down the path of full autonomy.

Recent unionization efforts could further accelerate such efforts and provide a nice runway for operating margins over the long-term.

With a robust balance sheet and enough financial flexibility to pursue greater autonomy, count me as unsurprised if Starbucks is one of the industry’s automation leaders around five years from now.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, SBUX stock comes in as a Moderate Buy. Out of 22 analyst ratings, there are 13 Buy recommendations, and nine Hold recommendations.

The average Starbucks price target is $95.55, implying an upside of 30.19%. Analyst price targets range from a low of $76.00 per share to a high of $136.00 per share.

The Bottom Line on Starbucks Stock

It’s been an ugly year for shares of Starbucks. However, the worst may already be brewed in. A lot of headwinds, including a recession, seem to be plaguing the stock.

With legendary leader Howard Schultz at the helm, I think there are many reasons to give Starbucks the benefit of the doubt. At 2.7 times sales, not a lot of optimism is factored in. As China’s lockdowns lift and U.S. comps remain robust, we’ll see just how strong the Starbucks brand can be through these tough times.

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