Starbucks Corporation (NASDAQ:SBUX) saw a double-digit share price rise of over 10% in the past couple of months on the NASDAQGS. As a large-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, what if the stock is still a bargain? Let’s examine Starbucks’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
Is Starbucks still cheap?
According to my valuation model, the stock is currently overvalued by about 21%, trading at US$84.30 compared to my intrinsic value of $69.79. This means that the buying opportunity has probably disappeared for now. Furthermore, Starbucks’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. If you believe the share price should eventually reach its true value, a low beta could suggest it is unlikely to rapidly do so anytime soon, and once it’s there, it may be hard to fall back down into an attractive buying range.
What kind of growth will Starbucks generate?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. Starbucks' earnings over the next few years are expected to double, indicating a very optimistic future ahead. This should lead to stronger cash flows, feeding into a higher share value.
What this means for you:
Are you a shareholder? It seems like the market has well and truly priced in SBUX’s positive outlook, with shares trading above its fair value. However, this brings up another question – is now the right time to sell? If you believe SBUX should trade below its current price, selling high and buying it back up again when its price falls towards its real value can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping tabs on SBUX for some time, now may not be the best time to enter into the stock. The price has surpassed its true value, which means there’s no upside from mispricing. However, the positive outlook is encouraging for SBUX, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.
If you'd like to know more about Starbucks as a business, it's important to be aware of any risks it's facing. When we did our research, we found 5 warning signs for Starbucks (2 make us uncomfortable!) that we believe deserve your full attention.
If you are no longer interested in Starbucks, you can use our free platform to see our list of over 50 other stocks with a high growth potential.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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