Understanding the bull and bear arguments can help investors make a decision.
Just like that first cup of coffee in the morning, Starbucks (SBUX 3.11%) received a jolt of energy when it announced a surprise leadership change less than two weeks ago. Laxman Narasimhan, who was the CEO for less than two years, is being replaced by someone many view as a superstar in the restaurant industry.
But what might look like a positive development doesn’t mask the fact that this top coffee stock trades 26% off its peak price reached in 2021. Does this dip mean you should buy Starbucks shares hand over fist with $1,000 right now? Investors should consider the bull and bear cases to gain some valuable insights before making a decision.
Starbucks bulls
On Aug. 13, Starbucks announced it hired Brian Niccol as its new CEO, effective Sept. 9. Niccol has been the top executive at Chipotle Mexican Grill since 2018. He deserves credit for turning things around at the Tex-Mex chain after it was dealing with a food safety crisis. Since he took that position on March 5, 2018, the restaurant stock has soared 740% (as of Aug. 23), almost 6 times the total return of the S&P 500.
Immediately following the news of Starbucks’ C-suite change, shares jumped more than 20%. Shareholders are hopeful Niccol can fix the struggling coffeehouse chain. The new CEO bolstered Chipotle’s digital infrastructure and drive-thru capabilities, helped drive consistent same-store sales growth, and significantly raised profitability.
Another reason to consider buying Starbucks shares is because of its powerful name recognition. There aren’t many brands in the restaurant sector, or in any industry for that matter, that are as well known as this one. Starbucks is known for its premium offerings, which have historically commanded pricing power.
There have been times throughout Starbucks’ long and storied history when it dealt with issues. I’m sure investors feared the brand’s value would take a hit. But given that Starbucks has been relevant for such a long time, it gives me confidence that it can successfully navigate the current challenges.
With a whopping 39,477 stores worldwide, you’re right to think that Starbucks is a ubiquitous chain. Only McDonald’s and Subway have more locations.
However, Starbucks still has growth opportunities. In the U.S., its most important market, the plan is to open more than 3,000 net new stores over the long term. The overall target is to have 55,000 stores open globally by 2030. Besides the potential for a much larger revenue base further down the road, the renewed focus on implementing cost cuts and driving efficiencies can help expand the bottom line.
Starbucks bears
In Starbucks’ case, as is true for any business in this industry, competition is perhaps the top risk that shareholders must always be mindful of. There is an unlimited number of options that customers can choose from when deciding where to buy coffee. Price, speed, variety, quality, and convenience are all factors Starbucks must always aim to excel at, unless it wants to lose market share.
Moreover, the restaurant industry has almost no barriers to entry. New coffee shops pop up all the time. This means competition will always be there.
Another bear argument might be surprising given that the stock has tanked 26% in the past 37 months. The valuation still doesn’t look cheap today. Shares trade at a price-to-earnings (P/E) ratio of 26.3. For comparison’s sake, the S&P 500 goes for a multiple of 24.2.
But the valuation is lower than the trailing five- and 10-year average P/E ratios. After looking at the bull and bear cases, I believe the positive perspective holds more weight. Patient investors might want to buy the stock with $1,000 right now.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
