Predicted surge in Starbucks share price to $40?
Starbucks Corporation, the world-renowned coffee giant, is currently grappling with a series of issues that have led to a decrease in its stock market price and profit margins.
In the last year, Starbucks stock (NASDAQ: SBUX) has dropped by approximately 15%, reflecting the market's concerns about the company's financial health. This decline comes amidst a challenging economic environment, where the company has faced increased labor expenses and higher costs for coffee beans and dairy products.
Labor expenses at Starbucks have surged 6-8% per year due to increased wages in response to union pressures. Meanwhile, coffee bean prices have increased nearly 15% year-over-year (as of July), and dairy costs remain high. These rising costs have put pressure on Starbucks' operating margins, which currently stand at around 13%, a significant drop from the $3.8 billion in operating income and 10.5% margin achieved over the last year.
Starbucks has historically suffered more significant losses than the overall market during downturns. For instance, during the financial crisis, Starbucks collapsed by 80% compared to the S&P's 57% decline. More recently, during the 2021-23 inflation shock, Starbucks stock fell 44% while the S&P 500 dropped only 25%. The company also experienced a 40% drop during Covid compared to a 34% decrease for the S&P 500 index.
Three critical issues—revenue growth, margin compression, and an inflated valuation—could drive shares down to $40. The stock continues to trade at high multiples of 37x forward earnings for FY 2025 and 30x for FY 2026. If the market reassesses Starbucks at a more realistic earnings multiple of 18-20x, shares could easily drop into the $40-50 range.
Moreover, same-store sales experienced a global decline of 2% in the most recent quarter, with global transaction volumes also decreasing by about 2% and a 3% drop in North America. Delivery and digital sales, which now account for more than 25% of transactions but yield lower margins due to third-party fees, have not been able to offset these declines.
Despite these challenges, Starbucks reported a net income of approximately $2.6 billion, resulting in a slim 7.2% margin. The company's "Back to Starbucks" reinvestment strategy, which requires over $3 billion in spending across three years, is aimed at addressing these issues and driving growth.
Starbucks is not alone in facing these challenges. The Trefis Reinforced Value Portfolio, which typically includes companies with strong fundamentals and undervalued stocks, has seen similar trends across sectors such as technology, consumer goods, and industrials. The risk of Starbucks losing another half of its value from the current point is substantial, but the company's resilience during downturns and its strategic initiatives suggest that it remains a player in the competitive coffee market.
Most recently, quarterly revenue rose 3.8% year-over-year, hitting $9.5 billion compared to $9.1 billion during the same period last year. Whether these initiatives will be enough to turn the tide for Starbucks remains to be seen.
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