Starbucks Stock: Rising Value or Overvalued? An Analysis

1. Stock rise: Starbucks' stock increased from $70 to $97 from May to November 2024.

2. U.S. issues: Q4 FY24 saw a 6% drop in U.S. same-store sales, driven by lower traffic.

3. China competition: Q4 FY24 sales in China fell 14% amid strong local competition.

4. CEO's plan: New CEO's strategies face challenges due to the vast U.S. store network.

5. Valuation high: At $97, the stock may be overvalued given current challenges.

Introduction

In May 2024, I bought Starbucks shares at around $70 each. I did this because I believed in the company’s strong foundation, growth potential, and new ideas. At that time, I thought of Starbucks as a long-term investment. It’s a popular global brand with loyal customers and a focus on keeping its menu interesting. With this background, buying at $70 seemed like a smart move with a good safety cushion for value investors like me.

Strong Performance and Price Surge

As of November 2024, Starbucks’ stock has gone up to about $97 per share, which is a solid jump from my original buy-in. This rise came from good earnings reports and strong confidence in Starbucks’ ability to adapt and grow. While this increase looks good, it makes me wonder if the current stock price is too high. A fast climb like this hints that expectations may be too optimistic, making me question whether the valuation matches the company’s real potential, especially with the issues it’s facing.

Challenges in Key Markets: US

Starbucks is having trouble in its main market, the U.S. In Q4 FY24, same-store sales dropped by 6%, mainly due to a 10% fall in customer visits, even though there was a 4% price increase. This shows that getting customers to visit more often is still a problem, even with new products and marketing pushes. This drop in traffic isn’t a small issue; it raises questions about whether the company can keep up its current stock value with changing consumer habits and more competition.

Uncertainty in China

China, Starbucks’ second-biggest market, is also facing problems. In Q4 FY24, sales in the region fell by 14%, with a 6% drop in the number of customers and an 8% decline in how much they spent. Local coffee chains like Luckin Coffee and budget-friendly brands such as Mixue are growing fast, making the market very competitive. This pressure limits Starbucks’ ability to set higher prices, making it harder to grow and stay profitable in a country that once looked very promising.

Management’s Plan

To tackle these issues, Starbucks’ new CEO, Brian Niccol, has laid out plans to improve the business. This includes hiring more staff, simplifying the menu, bringing back features like the condiment bar, and making mobile ordering better. While these ideas show the CEO understands what needs fixing, rolling them out in over 16,000 U.S. stores is a huge task. The challenge of making these changes work across so many locations means it could take time for results to show. This delay could test investors’ patience and impact the stock price.

Valuation: Is Starbucks Overvalued?

With the stock now at around $97 per share, it’s important to ask if this price is reasonable or too high. The current valuation suggests that investors believe Starbucks will successfully make all its planned changes, which is a lot to expect for a company dealing with challenges. When comparing Starbucks’ price to its past P/E ratios and to similar companies, it seems priced at a premium. This premium likely reflects high hopes for future growth that may already be accounted for. For those who focus on value, such a high valuation means less room for gains and a good reason to think about selling.

Conclusion

In summary, while Starbucks has shown strength and growth that boosted its stock price, the big challenges it faces in key markets like the U.S. and China raise doubts about whether the current price is fair. The company’s plans are ambitious, but real changes could take time, especially with tough competition and the scale of the business. As someone who values smart, long-term investments, these uncertainties have made me reconsider holding the stock at this price. If you have any questions or feedback, please feel free to reply to this email—I’d love to hear your thoughts.

Happy investing!
Josh

The information is provided for educational purposes only and does not constitute financial advice or recommendation and should not be considered as such. Do your own research.