Frankly, it’s a bit surprising that Starbucks (NASDAQ:SBUX) stock has held up so well. I was bearish on the company throughout 2018, and I’d argue fundamentals have continued to support my outlook. However, let’s give credit where credit is due. Starbucks stock is still near 52-week highs despite a rocky market and various pieces of company-specific bad news.

That bad news should begin to weigh on SBUX in 2019 though. Among the worrisome signs, analysts are waking up to the increasing risk of Starbuck’s aggressive China strategy.

Goldman Sachs recently dropped its buy rating for SBUX, suggesting that China is weak and could lead to a profit warning out of that region. A new competitor in China is gearing up for a major fight with Starbucks.

On top of that, the domestic market continues to be sluggish as competitors like Dunkin Donuts (NASDAQ:DNKN) keep pressuring Starbucks on the home front. Put it all together, and barring a major stock market rally in 2019, I don’t see Starbucks stock advancing much beyond the $65 level.

Luckin Coffee and Starbucks Stock

In my previous articles about Starbucks, I’ve warned that the company is betting too heavily on China.

In December, I noted that: “In the most recent earnings report, same store sales from China grew by just 1%. They grew at a significantly better rate in both the United States and the rest of the world excluding Asia. Starbucks is making a worrisome bet on a region that doesn’t like their main product and is showing anemic sales growth already.”

Well, nothing has changed on that front. Starbucks is still pushing full steam ahead. Unfortunately, they’re not the only company making a big play for the Chinese coffee market. Luckin Coffee launched in October 2017, but already is becoming a major competitor. Within a year, Luckin Coffee opened 1,500 stores and plans to open around 2,000 over the next year.

Luckin has several major differences from Starbucks, based on this analysis from leading China expert Jeffrey Towson. For one, Luckin concentrates much less on the highest-traffic/price real estate. Instead, it locates a block or two from major pedestrian areas. This allows it much cheaper overhead. That functions well, since Luckin is concentrated on take-out orders; many of its locations don’t even have seating.

Luckin is going for a lower-price strategy, offering prices 20-30% below Starbucks. That still puts Luckin in the same affordable luxury category as Starbucks, but at a more accessible price point. Starbucks, for what it is worth, charges roughly the same prices in China as in New York City despite far lower incomes in China.

Additionally, Luckin has an advanced digital strategy. In fact, they don’t even take cash; all orders must be done through their smartphone app. It remains to be seen how badly Luckin will hurt Starbucks, but with prominent backers, Luckin is a serious threat. It’s rumored that Luckin will be launching its IPO soon, as well.

Starbucks: Making Moves of Its Own

Bulls can counter the Luckin threat by suggesting that Starbucks has a cohesive strategy of its own. Starbucks’ digital initiative appears to be paying off in the U.S. And in both the U.S., with Ubereats, and in China with Alibaba (NASDAQ:BABA), Starbucks has established strong delivery options of its own.

This will keep Starbucks in the game when Luckin partners with the likes of JD.com (NASDAQ:JD), which has its own great logistics network, to fight for the delivery market.

It’s important to note that Starbucks isn’t just betting on China internationally. The company is coming up on 15,000 stores total outside of the U.S. Starbucks has around 4,000 stores in China now, meaning that almost 11,000 or so are not in China.

Many of these are in markets such as Latin America where incomes tend to be higher than in China on average, and there is also less local competition.

Starbucks made another big play last summer. It offered exclusive distribution rights for packaged Starbucks coffee to Swiss giant Nestle (OTCMKTS:NSRGY) for more than $7 billion.

While Starbucks gives up some upside from its consumer products, it gets plenty of other perks. For one, Nestle is a global leader in distributing consumer products and will undoubtedly get more shelf space for Starbucks in far-flung markets.

Starbucks still gets a solid revenue share of the products. And as management described it, this is a “brand amplifier” for Starbucks as it gets their products in front of a wider consumer base who may then visit the company’s cafes.

Starbucks Stock Verdict

It’s not all bad news for Starbucks. The deal with Nestle in particular looks smart, and management is using the proceeds to buy back stock which will support the share price. The partnership with Alibaba could be enough to hold back competition in China as well; time will tell.

The majority of signs still favor the bearish perspective on Starbucks stock, however. At more than 21x forward earnings, investors are paying a high price for SBUX.

If it were still growing same-store sales quickly, that’d be one thing. But same-store sales both in the U.S. and China are quite weak. Starbucks has already raised prices repeatedly over the year, how much room do they have left to push that lever?

On the expenditure side, rising labor costs will hit margins in the domestic market. Throw in strong competition in various key markets, and Starbucks has some challenges ahead. If a recession should happen to hit, it’s not hard to see Starbucks stock dropping back to $50 as consumers have to curtail their spending. At this price, SBUX stock comes with more risk than reward.

At the time of this writing, Ian Bezek owned JD stock. You can reach him on Twitter at @irbezek.