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“Can I have a Venti Dark Roast with one shot of Espresso? Oh, and should I buy Starbucks stock?”
Let’s find out in this Starbucks Stock Forecast and Analysis.
What is Starbucks?
In 1971, Starbucks began selling coffee at a little storefront in Seattle. It prided itself on ethically sourcing and roasting the highest quality beans in the world.
Fifty years later, Starbucks has become one of the most recognizable brands on Earth.
Its former CEO, Howard Schultz, revolutionized the service industry by prioritizing culture and innovation above the status quo.
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Starbucks Stock Investment Potential
#1. Cult Following
Starbucks is a luxury brand with a cult following. It is the Apple of the coffee market.
Carl Schultz reinvented the Starbucks culture during his time as CEO. Employees became baristas, and a “large coffee” became a Venti.
Shultz was planting seeds — these subtle changes in the way people spoke about Starbucks products began the company’s differentiation.
Production innovation kept pace with the company’s proprietary vocabulary.
Starbucks began offering coffee-related products that appealed to a wider audience, which was willing to pay a premium price for a premium experience it could not get elsewhere.
Similar to designer clothing brands, Starbucks’ premium pricing only reinforces its brand cache.
Brick-by-brick, the brand is built until there are millions of decentralized (free) advertisers spreading Starbucks’ brand awareness more effectively and authentically than any TV advertising campaign could achieve.
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Starbucks is embracing digitization via its mobile app, which simplifies ordering and increases awareness around new offerings. It also hosts the company’s growth engine: the Starbucks Rewards program.
The Starbucks Rewards program has 22 million active users and adds millions more each quarter. As the user base grows, so does engagement.
The company revealed that reward members order more frequently and spend more per order than non-app customers.
Starbucks will continue to grow as it gets on more and more home screens.
#3. Physical Expansion
Starbucks expects to have 55,000 locations by 2030, marking a 70% increase over its current 32,900 stores.
Starbucks is the dominant force in the coffee industry, but it only makes up approximately 40% of the U.S. coffee market. Expect Starbucks to aggressively pursue the remaining percentage.
However, Starbucks is even more focused on its opportunities abroad.
The majority of its expansion will occur in the international markets, most notably China. On average, a new Starbucks store opens in China every 15 hours.
Starbucks will directly compete with the controversial Luckin Coffee, which has thousands of locations and currently serves as the Starbucks of China.
#4. Drug Dealer on Every Corner
It helps that Starbucks’ core offering is addictive. While no government agency outright classifies caffeine as an “addictive substance”, they do acknowledge its ability to create dependencies.
This amplifies the potential for habitual consumption. The following captures Starbucks’ effectiveness:
Store on Every Corner + Convenience + Addictive Product
Drive-thru coffee is expensive because you’re paying for convenience. Starbucks amplifies convenience by being on every corner and expediting the entire process via on-the-go ordering.
The fact that the product creates physical dependencies is just icing on the cake.
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#5. Global Reopening
In-store Starbucks traffic is returning to pre-pandemic levels, yet much of the world is still recovering.
The vaccine rollout is ahead of schedule in the U.S, but the rest of the world is lagging behind. As Starbucks expands its reach, it has become more reliant on these markets.
Expect Starbucks earnings to rebound as the international vaccine effort catches up to the United States.
Starbucks Stock Moat
Starbucks combines brand affinity and addictive products to make one effective business model.
SBUX Moat = Cult Following + Addictive Product
There is typically an addictive component to cults — whether it’s the social comradery or (sometimes misplaced) sense of purpose, there is a force that keeps the members coming back for more.
However, few cult-dependencies are legal, publicly accepted, and encouraged beyond a niche, often private group.
Starbucks’ cult following is not only enforced by its “brand signaling” (cup, logo, and barista jargon) but also by its addictive product.
Coffee contains caffeine, which is a natural stimulant that is responsible for coffee’s addictive properties.
There is a complicated perception around drugs in society. Some are illegal, some allowed in certain qualities or to prescribed individuals, and others drugs are simply 100% legal.
Coffee is sold at the perfect intersection of the following:
- Full legality
- No negative stigma
- Health benefits
We understand that Starbucks is not the only place that sells coffee — coffee in and of itself is not a moat.
But Starbucks has been able to build one of the best brands in the world. And that is very difficult to replicate.
Starbucks Stock Analysis
Starbucks reported fiscal Q2 2021 earnings on April 27th. Let’s see the highlights and hear from the executives:
- Earnings per share: 62 cents adjusted vs 53 cents expected
- Revenue: $6.7 billion vs. $6.8 billion expected
- U.S. same-store sales rose 9%, returning to pre-pandemic levels
- Non-U.S. same-store sales increased 35%
- China same-store sales up 91% in the quarter
- Average order total up 21% from the previous quarter
As you can see, the company beat earnings but fell short on revenue estimates due to slower economic recoveries abroad.
CEO Kevin Johnson said that vaccination progress is key to predicting market success.
Starbucks expects to earn $2.65 to $2.75 per share for all of fiscal 2021 — analysts were expecting to hear $2.85 EPS for the year.
Wall Street had mixed reactions, and shares fell 2% in after-hours trading.
Starbucks Stock Competition
#1. Local Competition
There may be local shops that elicit their own strong following, but these scale in limited areas and are not a threat to Starbucks’ global market share.
Math is on Starbucks’ side — restaurants and coffee shops are tough businesses.
The Fall of the Starbucks Empire would require tens of thousands of local shops (that aren’t working together) to prosper.
#2. National Competition
People don’t have the bandwidth to acknowledge two national coffee leaders. Starbucks has the throne.
Some brands might be more popular in certain geographical areas, like Dunkin’ in New England or Tim Horton’s in Canada. But they struggle to compare to SBUX on a global scale.
Here are Starbucks’ top competitors:
- Dunkin’ (DNKN)
- McDonald’s (MCD)
- Restaurant Brands International (QSR)
- Luckin Coffee (OTCMKTS: LKNCY)
- Chipotle (CMG)
- Yum! Brands (YHM)
- Laird Superfood (LSF)
- Keurig Dr Pepper (KDP)
McDonald’s has a larger global presence than Starbucks. However, the two companies attract different customers and are popular for different reasons.
These battles will intensify as Starbucks continues to expand its menu.
Starbucks Stock Bear Case
#1. Coffee and the Economy
Starbucks is a global brand that is vulnerable to economic downturns at home and abroad.
While most Fortune 500s have a global presence, some businesses are less recession-proof than others.
For example, a company can’t afford to cut back on its cybersecurity budget during tough times, but individuals might reduce their consumption of pumpkin spice lattes.
We don’t expect people to quit drinking coffee when the S&P 500 dips, but luxury coffee and dining out are areas of the budget that are likely to get cut.
Starbucks shares this vulnerability with its competitors, so this “bear case” is relative to other industries and not so much within the scope of the coffee market.
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#2. Expansion Risks
On a more granular note, Starbucks must deliver on its expansion plans to please Wall Street. This requires a ton of overhead, which comes with risk.
At times, U.S. companies that aggressively expand in China run into short-term turbulence. This is currently happening with Tesla.
While making cars is different from brewing coffee, there are inherent uncertainties that come with doing business in China.
Starbucks Stock Allocation in Your Portfolio
So, how much Starbucks stock should you buy, if any? The following questions might help you decide:
- Is Starbucks stock consistent with your investing goals and time horizon?
- Is Starbucks’ brand affinity sustainable or fleeting?
- Can Starbucks execute on its China expansion?
- Is Starbucks’ moat large enough to fend off competitors?
- Will changing work habits and less commuting affect Starbucks stock?
- Can Starbucks successfully expand its menu and enter new markets?
- Will a shortage of workers hurt the company’s margins?
Hopefully, these questions get the ball rolling for you — portfolio allocations depend on an array of personal factors and vary from person to person.
Bonus: Stock Tip from The Motley Fool
On-the-go ordering will ramp up with the launch of 5G – a trend The Motley Fool thinks will change the world (5G, that is, not so much a decaf coffee).
In fact, The Motley Fool may have identified a small Pennsylvania company that will benefit greatly from 5G’s rollout.
Join the Motley Fool Stock Advisor today and receive the details on this next-gen company.
See: Motley Fool Review
Starbucks Stock Analysis FAQs
Is Starbucks a good investment right now?
Some consider Starbucks stock to be a good investment right now because it embraces digitization via its mobile app and rewards program.
Data reveals that Starbucks customers who participate in the rewards program order more frequently and spend more on those orders.
Does Starbucks pay a dividend?
Starbucks pays a dividend of $0.45 per share of Common Stock.
Is Starbucks a Buy, Sell or Hold?
Starbucks is a buy, sell, or hold, depending on your personal investing goals. However, long-term investors might find Starbucks stock attractive because of the company’s loyal customer base and global expansion.
Is Starbucks profitable?
Yes, Starbucks is profitable. The company’s profit margin is currently around 10%, which measures a company’s overall efficiency in turning revenue into profit (higher the number, the more efficient). Starbucks’ margins have fallen due to the pandemic, but they are trending back in the right direction.
Bottom Line: Starbucks Stock Analysis
Starbucks is more than a “reopening stock”. It is a trend-setting company that will continue innovating and setting the standard for the food services industry.
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This article is for informational purposes only. It is not intended to be investment advice.