Today, I’ll be diving into a stock analysis of Starbucks Corp, ticker symbol SBUX. As of now, the stock is trading at $108.2, with a market cap of around $123 billion. The price-to-earnings (P/E) ratio is 35.9, and the annual dividend yield is 2.14%. The 52-week high for the stock is $125.6, and the 52-week low is $71.5.
Analysts are somewhat divided on Starbucks, with half recommending a buy and the other half suggesting a hold. The lowest price target is $76, and the highest is $120, with an average target of $138. Currently, the stock is trading at $108.2 after latest earning.
In this article, I’m going to explore whether Starbucks is a good value play. Keep in mind, this is just my opinion and for entertainment purposes only—it's not financial advice. You should make your own investment decisions.
Earning Overview
Starbucks reported its Q1 fiscal year 2025 earnings with some notable highlights:
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Net Revenues: $9.4 billion, flat compared to the prior year.
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Earnings Per Share (EPS): $0.69, reflecting a 23% decline year-over-year.
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Comparable Store Sales: Declined 4% globally, with North America and U.S. sales also down 4%.
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Store Openings: 377 net new stores, bringing the total to 40,576.
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Starbucks Rewards Membership: 34.6 million active members in the U.S., up 1% year-over-year.
The company is focusing on its "Back to Starbucks" strategy to address underlying issues and restore brand confidence
Fundamental Analysis
For a company like Starbucks, I believe the discounted cash flow (DCF) model is the best way to value it. With some tech companies, you can factor in a growth premium, but with Starbucks, I’m not convinced there’s significant growth potential unless something major changes—like reducing labor costs with automation, securing cheaper coffee beans, or dramatically improving margins. I think Starbucks has reached its peak size, similar to my views on fast food chains like McDonald’s. Once a company has gone global and captured much of the market share, it becomes harder to sustain rapid growth.
Starbucks is a bit different from McDonald's because you can place a Starbucks anywhere and still generate revenue. But I don’t believe that they can keep growing at a fast pace by just opening more stores. Ultimately, Starbucks is a very mature company, and I don’t see explosive growth moving forward—unless something really innovative happens.
Free Cash Flow
Starbucks has experienced a decline in its free cash flow over recent periods. For the twelve months ending September 30, 2024, Starbucks reported a free cash flow of $3.318 billion, which is a 12.34% decrease from the previous year. This decline can be attributed to several factors:
Increased Capital Expenditures: Starbucks has been investing heavily in store renovations and new store openings, which has increased its capital expenditures.
Operational Challenges: The company has faced operational challenges, including supply chain disruptions and increased labor costs.
Global Economic Conditions: Economic uncertainties and fluctuating consumer spending have also impacted Starbucks' cash flow.
Valuation
Now, as we move into the DCF valuation, using trailing 12-month data, I calculate Starbucks’ weighted average cost of capital (WACC) to be 5.86%. With a growth rate of 6%, my model shows that Starbucks is pretty much at its fair value at around $90—no upside, no downside. This is rare, and honestly, I’m not seeing the potential for a 6% growth rate in free cash flow. Given the company's maturity and market saturation, I think a more realistic growth rate is closer to 4%.
At its current price of $108, I wouldn’t buy Starbucks. If the stock drops to the $80-$85 range, that’s where I’d start considering it as a good value. If you can grab it near the 52-week low of $71, even better. But with growth expectations low, I’d view the stock more as a stable income-generating company rather than one with significant upside.
Technical Analysis
For Starbucks (SBUX), the key technical support and resistance levels are as follows:
Support Levels:
$95.00: This level has shown strong support in recent trading sessions.
$90.00: Another significant support level, which has historically limited downward moves.
Resistance Levels:
$105.00: This level has acted as a strong resistance, limiting upward moves.
$110.00: A higher resistance level that could be challenging to break through.
These levels are based on recent price action and technical indicators. It's important to monitor these levels as they can provide insights into potential price movements.
Conclusion
In summary, I think Starbucks is either a hold or a sell right now. I’d only consider buying if the stock dips closer to a fair value of $75 or so, which is what my DCF model suggests. Let me know what you think—do you see Starbucks as a buy, hold, or sell? Leave your thoughts in the comments below and don’t forget to subscribe if you enjoyed the article. Thanks for reading!
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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