Defying the overall market’s weakness, Starbucks (NASDAQ:SBUX) stock has actually risen over the last two months. Despite the market’s nearly 10% decline over the last three months, Starbucks stock has soared by more than 26% during that period.
However, Starbucks also faces a home market with too many stores. And China, where the company plans to add more new stores than any other country in the near-term, is in the midst of a trade war with the United States. Although Starbucks’ profits should continue to grow by double-digit percentage levels for years to come, Wall Street appears to be underestimating the uncertainty surrounding Starbucks stock.
Starbucks Stock Has Been Steadily Rising
SBUX stock has slowly and steadily increased as most stocks fell into bear-market territory in October. SBUX rose even faster after it announced its fiscal fourth-quarter results on Nov. 1. Higher than expected fiscal Q4 comparable store sales sent SBUX stock soaring by 9.7% following this announcement. Now Starbucks stock trades near its 52-week high.
A comparable store sales increase of 3% versus analysts’ consensus estimate of 2.4% sent the stock surging. Not even news of layoffs at Starbucks’ corporate headquarters deterred investors from buying Starbucks stock.
But in the Asia-Pacific region, dominated by China, comparable store sales increased just 1%, beating the consensus estimates of a 0.1% increase.
In China, Starbucks currently opens a store every 15 hours on average. The anemic same-store sales increase in the Asia-Pacific region suggests that Starbucks’ new stores in China could cannibalize its existing stores and eventually negatively impact the country’s profitability. Meanwhile, China’s macro outlook remains worrisome, partially because of the U.S.-China trade war. Of course, if Starbucks’ profits in China drop, Starbucks stock would likely take a significant hit.
Furthermore, while Starbucks’ comp sales in the Americas rose by 4%, well above the 2.9% consensus estimate, the company cannot add any more stores in the U.S. and Canadian markets, as those markets are already saturated with Starbucks stores.
Watch the Multiple of Starbucks Stock
The valuation of Starbucks’ stock also appears to be a cause for concern. For the fiscal year that ended on Sept. 30, the trailing price-earnings ratio of SBUX stock stood at just over 28. And the stock’s forward price-earnings ratio, based on the consensus earnings outlook for fiscal 2019, is 25.6. Admittedly, the latter ratio is slightly below the stock’s average multiples of the last few years. However, it seems like a high valuation, considering that analysts expect SBUX to grow 9.5% this year and 13.2% in 2019.
While I do not necessarily challenge these projections, the company’s outlook in China is uncertain and there are questions as to whether it can profitably increase its penetration of other parts of the world. For example, SBUX recently entered Italy, the country whose coffee culture inspired Starbucks. We have yet to know how well America’s take on Italy’s coffee culture will succeed in Italy. However, in most cases, Starbucks’ new markets will either have a long-established coffee culture or no coffee culture at all.
I imagine that SBUX will be successful in some markets and fail in others. In other countries in which SBUX has had some success, it may struggle to increase its comparable store sales going forward. I expect Starbucks to eventually rival Coca-Cola (NYSE:KO) and McDonald’s (NYSE:MCD) as global brands, but I think that SBUX stock is too expensive, given the uncertainty of its growth outlook.
Final Thoughts on Starbucks Stock
Given the high price-earnings ratio of Starbucks stock and its uncertain future growth, investors should think twice about using Starbucks stock as a safe haven from the falling market.
Despite all of the challenges Starbucks is facing, Starbucks stock trades for close to 30 times its earnings. I believe the company will be successful in many of its markets, and that its profit will continue to grow by double-digit percentage levels. However, in light of the numerous headwinds faced by SBUX, investors should look to energize themselves using Starbucks’ coffee instead of Starbucks stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
