Starbucks Stock: Bull vs. Bear

Given the market’s huge resurgence, investors might think that all stocks have been crushing it. But that isn’t true.

Take Starbucks (SBUX 0.12%). Shares of the coffeehouse giant have fallen 7% since the start of 2023 (as of March 5). This lags the 34% gain of the S&P 500 during that time. Some of you might view this business as a possible opportunity today.

Let’s look at the bull and bear arguments for this leading restaurant stock. Then you’ll come away with some basic knowledge that can inform your decision-making process.

What the bulls say

To be as successful as Starbucks has for such a long time, there needs to be a strong competitive advantage. In this case, it’s the company’s powerful brand.

This not only results in significant pricing power, but it also helps differentiate Starbucks’ offerings versus rivals’. And I’m confident that because of the brand’s relevance, this business will still be dominating the industry decades from now.

Investors can’t ignore just how financially successful Starbucks is. In the last decade, the company’s operating margin has averaged 14.9%. Credit goes to its massive scale, which has resulted in consistent profitability.

Starbucks produced $6 billion of operating cash flow in fiscal 2023 (ended Oct. 1), which is a usual occurrence. Management directs this capital to dividends and stock buybacks. In fact, since Q1 2019, the company’s outstanding share count has been reduced by 9%, a move that boosts earnings per share.

What has helped Starbucks maintain its position in an intensely competitive industry is its focus on bolstering its digital capabilities. Perhaps no other restaurant chain does it better. It’s all about increasing accessibility and convenience for its customers, which includes its thriving mobile app. It boasts 34.3 million 90-day active members in the U.S.

Starbucks is able to collect comprehensive data from its customer base that can be used to drive marketing campaigns and menu introductions. The coffee titan also does a good job of engaging consumers. In the latest fiscal quarter, Starbucks had the second-most gift card activations of any brand in the U.S.

What the bears say

Despite Starbucks’ well-known brand and its impressive mobile app, industry dynamics should always be on the top of every shareholder’s mind. The entire restaurant sector, including the retail coffee industry, is extremely competitive. This means that Starbucks can’t rest on its laurels. It will constantly have to focus on finding ways of better serving its customers to maintain its position.

In the U.S., the business goes against heavyweights like McDonald’s and Dunkin’ Donuts, plus the vast number of independent coffee shops that have a more premium feel. In the company’s fastest-growing market, China, Starbucks must worry about the more dominant Luckin Coffee.

I applauded the company’s consistent profitability earlier. But it’s discouraging to know that operating margin in fiscal 2023 of 16.3% was lower than the 16.5% it was in fiscal 2013. The business hasn’t been able to expand margins lately.

The leadership team wants to drive greater efficiencies going forward, which could help the bottom line rise faster than sales if strategies are executed properly. However, given the huge increase in revenue in the last decade, without a corresponding lift in margin, it’s hard to be optimistic.

Even though Starbucks currently has 38,587 stores across the globe, management sees there being 55,000 locations open by 2030. A lot of this growth will come from China, but there’s considerable potential even in the U.S. Further penetrating existing markets with digitally enabled smaller-format stores is vital.

However, it’s totally unreasonable to expect Starbucks to register much faster revenue growth in the years ahead than it did historically. This is a mature enterprise, so naturally, its opportunity set will diminish.