In this post, we’re diving into a hot topic that’s been making headlines: Starbucks stock and why some analysts think it could more than double under its new CEO. Let’s break down the details and reevaluate the situation now that some time has passed since the initial buzz.
The Big News: Starbucks’ New CEO
A couple of weeks ago, Starbucks announced a new CEO, which sent its stock soaring. Interestingly, we had just filmed a video evaluating Starbucks before the news hit. Once the CEO announcement dropped, the stock price jumped by 25%. So, now that the dust has settled, it’s time to take a step back and reassess Starbucks’ fundamentals.
Under the new CEO’s leadership at his previous company, Chipotle, stock prices soared sevenfold. While that’s impressive, the question remains: can he replicate that success at Starbucks? For context, during his time at Chipotle, the CEO also opened about 1,000 new stores globally and introduced new technologies. While those innovations are noteworthy, it’s essential to ask whether they’re needed at a company like Starbucks, especially since the coffee chain already has a strong global presence.
Financial Overview
Let’s dive into Starbucks’ fundamentals. Starbucks is a strong brand with a solid history, but the market for coffee chains is quite saturated. Its revenue and free cash flow growth haven’t been particularly exciting lately, and competition is rising, especially in major markets like China, where competitors like Luckin Coffee are making strides.
Despite this, Starbucks is aggressively buying back shares, which is generally good for investors. However, the real question is whether these buybacks are being made at the right time. While Starbucks’ dividend growth is modest, its overall financials—such as a PE ratio of 21.5, a dividend yield of 2.3%, and return on invested capital—are solid for a coffee chain.
When it comes to key financial ratios, nothing jumps out as overly alarming. The selling and general expenses ratio is below 20%, which is great for a company like Starbucks. This shows that the brand is so strong that it doesn’t need to spend heavily on marketing to maintain its position. However, there was some buzz about the new CEO’s use of private jets, which might push these expenses higher in the coming years.
Valuation: Is Starbucks Still a Good Buy?
When it comes to valuation, we use a discount model to project Starbucks’ potential value over the next 10-15 years. One thing to remember is the impact of new store openings. Starbucks has already penetrated most markets, so it’s uncertain how many more new stores can be opened in lucrative areas. Nonetheless, investors seem hopeful that the new CEO might tap into fresh opportunities in untapped markets, which could drive future growth.
Looking at the numbers, if we assume a 6% growth rate over the next 10 years, Starbucks stock might be a solid long-term hold. However, with a more optimistic 10% growth rate, the value projection is even higher. But again, that’s assuming everything goes perfectly under the new leadership.
For now, Starbucks’ PE ratio is hovering around 22, which is reasonable compared to its industry. However, the spike in stock price after the CEO announcement feels overblown. The CEO hasn’t made any concrete changes yet, and paying a premium based on potential alone is risky.
Our Verdict
We always emphasize sticking to the facts and avoiding hype. Starbucks is a solid, stable brand, but at its current valuation, it seems investors are banking heavily on the new CEO delivering something spectacular. While Starbucks has some growth potential, especially with store expansions in new markets, we urge caution before jumping on board just because of leadership changes.
The takeaway? Stick to the fundamentals. Right now, Starbucks is a bit overpriced based on what’s actually changed, which, for now, is just the new CEO walking into the office.
Final Thoughts
Stock markets can often be driven by news and emotion. However, staying grounded and focusing on data is the key to smart investing. At the moment, it seems like Starbucks might be a great company but at a price that’s hard to justify based on the facts we have today.
Thanks for reading, and until next time—happy investing!
