Starbucks (SBUX) stock is incredibly out of favor right now, with shares plunging more than 2% on a turbulent Thursday for the broader markets. The stock is now down around 17% from its May highs and nearly 22% from its all-time highs, not seen since July 2021.
And it wasn't just broader market weakness that sent Starbucks sagging this week. A notable downgrade from a widely followed analyst also has investors passing up on shares of the coffee kingpin. Add intensifying competition in the Chinese market into the equation, and it's clear that many investors would rather sell now and ask questions later.
However, I think it's an absolute mistake to give up on Starbucks as we sail into pumpkin spice season. Not only could pumpkin spice lattés help the shares wake up, but new menu items, continued innovation, and a potential turnaround in consumer sentiment could help the company surpass expectations - which can currently only be described as relatively muted.
A Notable Analyst Downgrade Adds to Starbucks' Woes
Specifically, TD Cowen on Tuesday reduced Starbucks stock to a Hold rating from Buy, while also lowering its price target to $107 from $117. The $10 per-share cut was attributed to macro headwinds in China — the market remains a major growth driver for Starbucks — that could take a jolt out of consumer spending. In addition, TD Cowen also noted that Chinese competitors may steal Starbucks' lunch.
Clearly, the Chinese economy is stuck in a bit of a funk. Though stimulus from the Chinese government could help nudge the economy into some sort of turning point, the market doesn't seem to be at all confident in Starbucks' ability to keep its same-store sales comps going strong in a market that could stay sluggish for many quarters to come.
As for potential rivals in China, I'm not so convinced of the threat. Sure, Luckin Coffee (LKNCY) is a hot, local coffee chain that's been more than willing to innovate with intriguing concepts such as alcoholic coffee. And though Luckin and other rivals may be able to offer solid brews at lower prices, I think that citing Chinese competitors as a headwind for Starbucks is to severely discount the company's brand power.
Don't Discount Starbucks' Brand Power in China
At the end of the day, Starbucks is one of the strongest brands not just in the U.S., but in the world. Given China is fond of U.S. brands, I don't view Luckin as a serious long-term threat to Starbucks as it continues to expand its footprint across the Chinese region.
Sure, some Chinese consumers may prefer cheaper coffee. But at the end of the day, a cup of Starbucks makes a statement. In a way, the green mermaid logo is a status symbol. And in a nation that values status highly, I simply do not think a Chinese rival can upend Starbucks' dominance. Furthermore, I think the Starbucks brand may actually be stronger in China than in markets like the U.S. or Canada, where there's no shortage of coffee shops.
All considered, I view the TD Cowen downgrade as slightly overblown and opening a window of opportunity for dip-buyers to get the stock at a lower price.
Starbucks Stock: What About Valuation?
As of this writing, Starbucks stock trades at 28.84 times trailing price-to-earnings (P/E), and offers a nice 2.28% dividend yield. With a solid 7.5% quarterly dividend hike in the books and the means to overcome well-known headwinds (like those in China), I view Starbucks as one of those GARP (growth at a reasonable price) names.
Yes, there are headwinds, and the stock could continue to retreat over the near term as consumers feel pressured. However, long-term investors may wish to watch the dip closely for an entry point. Personally, I think there's strong support in the low $90 range.
The Bottom Line on Starbucks Stock
Despite the latest analyst downgrade and concerns about growth in China, I remain upbeat, just like Mad Money host Jim Cramer, who recently stated that he thinks it's "a mistake to hate" SBUX. It's also noteworthy that he owns the stock through his charitable trust.
Its key growth market of China is under pressure, but as economic tides turn, I think you'll want to be in Starbucks stock as the firm embarks on what could be a profoundly profitable expansion.
On the date of publication, Joey Frenette had a position in: SBUX . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
