Is Starbucks overvalued?

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Is Starbucks overvalued?

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Overview

As everyone is aware of the corona crisis prevailing all over the world, one evident headwind that Starbucks has to overcome is the recession. However, the greater majority of the high-income group have maintained their positions during this downturn; the coffee outlets will hurt its sales due to this phase of the economic slowdown. Credit rating agency Fitch recently downgraded Starbucks’ debt from BBB+ to BBB which made the company look negative from stable. The credit rating agency mentioned the reasons for cutting down the grades of Starbucks which was Starbucks’ recent issuance of $3 billion of new debt and the impact of coronavirus that interrupted the business, it was also predicted by Fitch that Starbucks’ revenue could go down by 14% in the current year and EBITDA will collapse by a massive 60%.

Financial Situation
Focusing some light on the past, Starbucks’ sales growth slowed downed drastically in Q3 2018 both in the US and in China which influenced many investors to sell their stocks in a panic. But it didn’t take Starbucks much long to take a U-turn as the stocks raised 60%. Racial biases in Philadelphia during that year led to repercussions against Starbucks which also affected the marketing efforts of the company. It was an unpredictable and panicking situation for investors to experience a slowdown in Starbucks’ growth in China.
According to Starbucks’ CEO Kevin Johnson, the company was also impacted by social distancing. Companies are likely to generate more revenues in its stores as many of the customers would probably order food and more than one drink if they spend a long time with their companion, therefore, the outlets could have generated more than 20% of its revenue if the beverages were sold at its store.
The impact of the economic downtrend of Starbucks’ result is stronger in China than in the US; the reason being that Starbucks drinks are more costly in Asian countries than in the US even though salaries of China are much lower. Taking into account the condition of the Chinese economy which grew just 1% in 2020, it is clear that Chinese individuals will hesitate before spending the amount on Starbucks drink as it is considered as an extravagant luxury by the citizen. All these factors are likely to impact Starbucks stock to some extent. However, the nation returned to work in April and most of the companies reopened their store by month-end despite which Starbucks’ sale in China in April was down by almost 35%.


Following the results of several quarters, Starbucks has managed to improvise its sales track all over the world as the sales rose by 3% in Q4 2018 which included a 4% growth in the US and return in growth in China. Considering all the issues faced by Starbucks in China, it can be forecasted that the sale in China would be roughly flat in Q4 compared to the previous year. It also expanded its number of stores in China by 16% over the previous year which also contributed to its sales growth.

Other Factors

Apart from social distancing, there are other factors which can impact Starbucks stocks negatively during this pandemic situation. The work from home culture will not be favorable for Starbucks as consumer-preferred buying coffee on their way to work or even during their breaks. Many retail outlets are also going bankrupt, the closure of hundreds of brick and mortar stores is hurting Starbucks as many people enjoyed buying Starbucks coffee before or after shopping. Even after considering all these negative analyses of Starbucks, the SBUX stock has fallen by just 16% in the present year and 5% in the last twelve months.

Final Take

Keeping in mind the challenges faced by Starbucks this year and beyond, its forward price-earnings ratio is considered very high which indicates that Starbucks might experience growth in the future.
It is recommended for the medium term and long term investors to sell Starbucks stock taking into consideration the issues of social distancing which will reside for quite some time following to it the work from home culture and also US-China animosity. The number of brick and mortar stores depends on the Chinese economy. The weaker is the economy, the fewer the number of stores.
Starbucks anticipates high single-digit growth in revenue and a slightly faster pace in EPS growth over the long term and even if Starbucks ends up beating the EPS target, SBUX stock looks extremely overvalued.

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