Is It Time to Bet Against Starbucks?

I am a fan of Starbucks (SBUX) and I have been bullish on the company for quite some time. I strongly believe that Starbucks’ business model is built to last for the long-term. The presence of Howard Schultz at helm, along with the company’s track record of innovation has been Starbucks’ driving force over the years.

With Starbucks still reporting strong comps growth, Starbucks longs can’t ask for more. Despite Starbucks strong business model and growth, I think the stock’s valuation is a bit stretched. While the company has many markets for expansion, I think now is not the right time for investors to consider buying the stock.

Starbucks recently shared its quarterly results.
As usual, the results were great as Starbucks reported global comparable store sales growth of 8%. The company's operating margin jumped 60 bps to 19.7% as lower dairy and coffee costs kicked in. FY16 earnings guidance was set at $1.87 to 1.89 vs. $1.89 consensus, whereas the company expects Q2 EPS to be in the range of $0.38-$0.39.

Despite the strong numbers, investors didn’t react nicely to the news as Starbucks’ shares plunged almost 4% the following day. Given the valuation at which Starbucks is currently trading, investors are expecting the company to continue reporting strong comps growth for years to come.

Starbucks is currently trading at 36x trailing earnings. Clearly, investors have already priced in years of growth into Starbucks’ current share price. At such a high valuation, even a minor disappointment can send the stock a lot lower. So, while I do think Starbucks’ business is great, but the stock is not attractive. Investors considering opening a long position should wait for a better entry point as I think Starbucks’ upside is limited for the time being.

Although Starbucks has a lot of room to expand its business, the company’s comps growth will eventually slow down and this will have a negative impact on the stock.


Starbucks has managed to grow comps new innovations like Starbucks Mobile, but the growth will eventually slow down. While I still like Starbucks’ business, I think the stock is very expensive and is not a buy right now. Although the company does have a lot of room for expansion, all the future growth is currently baked into its share price. As a result, I think investors should wait for a better entry point in order to buy the stock and should continue avoiding it at the current levels.
Published on Jan 26, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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