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Pros and Cons of Buying Starbucks Stock

John Divine

Shares of Starbucks Corporation (ticker: SBUX) have been on quite the journey in 2019. Shares not only hit all time highs but experienced a swift pullback, and investors may find themselves wondering exactly how much opportunity remains.

But before delving into that finer points, it's important to acknowledge that SBUX stock has one thing going for it right off the bat. The company's geographic reach, for one, is famously ubiquitous, with over 31,000 stores globally. About 18,000 of those are in the U.S., which means the average American state is home to 360 Starbucks locations.

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That sort of reach de-risks the stock a bit, which should be important to any investor. While that checks off one box in the company's favor, the larger question remains of whether shares of the coffee chain are priced attractively.

Starbucks Stock at a Glance

Starbucks is trading around $82 per share, with a one-year estimated target price of $94.50, according to analysts who closely track the stock.

Starbucks stock, although up 27% in 2019, has fallen about 2% since the company released fiscal fourth-quarter earnings in late October. This wouldn't be too worrisome if it weren't for the fact that Starbucks actually beat quarterly expectations, and that shares were already on a downtrend before the release.

So for momentum-based investors, or those who time their buy-in points to correspond to technical analysis, buying SBUX may look like a fool's errand. Shares are down 17% from intrayear highs and still falling, even after a solid quarter.

Pros to Buying SBUX Stock

In the restaurant business, success on Wall Street is largely driven by two metrics: growth in store count and growth in same-store sales. The average person might expect that a company as massive and global as Starbucks simply doesn't have much of a chance to meaningfully grow its store count from here. And the average person would be wrong.

Last quarter, global net stores grew by 7% year-over-year, rising from 29,324 to 31,256. That's a healthy clip, and while the U.S. market may be saturated for Starbucks, the big opportunity comes overseas, especially in China, where the store count grew 17% year-over-year.

"As China creates a larger middle class, their appetites will mature toward eating more meat and potentially shift from a tea-drinking society to coffee, much like we've seen in Starbucks' expansion in Great Britain," says Sam G. Huszczo, owner of SGH Wealth Management in Southfield, Michigan.

The second financial metric every restaurant investor watches like a hawk is same-store sales, which, in the case of SBUX, grew by 5% last quarter. The only way to grow comparable sales is via more transactions, higher prices, or some combination of the two. Both domestically and abroad, Starbucks achieved this growth through a combination of both factors, which is a good sign that shows consumers are willing to tolerate modest growth in prices.

One growth lever that Starbucks has been extremely smart to develop is the coffee giant's focus on technology as a way to streamline operations, grow sales and facilitate loyalty. Its mobile app is considered best-in-class in the industry, and incentivizes users to utilize mobile ordering and to track their rewards points through the same app. It's a hit with users, as active Starbucks Reward membership in the U.S. jumped 15% year-over-year to 17.6 million.

[Read: 10 Growth Stocks to Buy When the Economy Slows.]

Also, Starbucks signed a $7.15 billion deal with Nestle last May that will allow that company to market Starbucks products in international markets. The deal, which includes royalties to be paid to Starbucks, will make the company's products available in nearly 200 markets.

Lastly, the company returned $2.7 billion to shareholders last quarter through stock buybacks and dividends, bringing fiscal 2019 total capital returns to $12 billion. Starbucks also announced that it was raising its quarterly dividend by a healthy 14% clip.

Cons to Buying SBUX Stock

Market watchers aren't as down on SBUX as they are loaded with questions and uncertainties about the coffee giant's growth prospects.

As is often the case with particular stocks, a company's biggest strength can also serve to be its most sizeable vulnerability.

"Assuming Starbucks will continue its growth is not assured, but with its experienced management in place, we could see them having success in Asia," Huszczo says. For Starbucks to continue its pre-2015 growth, the company will have to successfully branch out to more areas in the world, according to Huszczo.

The market agrees, and indeed, Asia is where Wall Street expects to juice future growth from. But in the most recent quarterly report, management did something somewhat worrisome, announcing a change in the way it would report geographic results. Specifically, it's combining China/Asia Pacific and Europe, Middle East, and Africa into one, hazy international reporting segment.

As a rule of thumb, it's not good when a company reduces its transparency.

Another issue to frankly address is that, while 5% same-store sales growth is generally considered quite good, it's more helpful to put numbers like these in context. McDonald's Corp. ( MCD), for instance -- a direct competitor to Starbucks with its McCafe offerings (not to mention Starbucks' growing interest in breakfast) -- grew global same-store sales by 5.9% in the same period. About a year and a half ago, McDonald's was seeing 2.9% comps growth, which was still better than Starbucks, which was at 2%.

This begs the question: How much of the coffee chain's recent success is wholly determined by macroeconomic factors versus its own strategy?

The last hurdle potential investors should grapple with is simple: is SBUX stock overvalued?

At a valuation of $100 billion, one can certainly argue Starbucks is a blue-chip stock. But does a coffee chain growing top- and bottom-lines by 7% and 13%, respectively, really deserve to trade for 28 times earnings? Looking at the P/E ratio over the years, one can gauge how unusual this multiple is, and though SBUX has traded for more than 20 times earnings for years in the recent past, a P/E in the upper 20s is higher than average.

Aggressive plans to open 1,100 new stores in China and elsewhere in Asia still make SBUX somewhat of a growth stock, and that should help Starbucks investors down the road.

The Bottom Line on Starbucks

If you can trust Starbucks to continue to focus on its customer service culture, SBUX is a good long-haul play, experts say.

"Starbucks management's rich history of taking the long view and looking beyond just shareholders to all stakeholders involved is proving to be an effective way to grow a durable and lasting business," says Jason A. Moser, senior analyst at The Motley Fool. "Affordable health care for all employees, supplier diversity and even race relations are just a few examples of conscious capitalism at Starbucks hard at work."

Starbucks should continue to do well domestically in the coming years but investors should be particularly encouraged with the opportunity that remains in China, Moser says. Moser also points to the company's powerful brand, market-leading position in coffee and fast-growing presence in tea as evidence that Starbucks is "becoming a global beverage powerhouse."

[See: 10 of the Best Stocks to Buy for 2019.]

And at the end of the day, whether Starbucks stock is a buy depends on a few variables. Perhaps most importantly, SBUX needs to execute on the high growth Wall Street expects from China to justify its valuation. Even with such growth, the bullish markets seem to have at least slightly elevated the stock's valuation.

While long-term investors will likely earn acceptable returns if they buy in at these levels, shorter-term investors or those with more discerning eyes might want to wait patiently for a better entry point to this well-run mainstay of the service industry.



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