Starbucks (NASDAQ:SBUX) stock caught a break when Luckin Coffee (NASDAQ:LK), which claimed to be its Chinese nightmare, turned out to be a fraud.
Until the fraud was discovered, Luckin Coffee had everyone fooled. It had me fooled, although I wasn’t recommending you buy it.
If Starbucks had ever been a direct competitor to Luckin, it might be in better shape. Luckin was basically Starbucks take-out and delivery.
But Starbucks never was a direct competitor to Luckin. As I wrote last month “Starbucks sells coffee as a luxury good.” The couches, the Wi-Fi, the soothing music, they’re all part of the thing. Even if you just grab-and-go, you know they’re there. It’s what you pay for.
That is Starbucks’ real problem.
Getting Past the Virus
Unless it gets new capital in some form, SBUX stock is facing an existential threat from the novel coronavirus.
At the end of December, Starbucks had $3 billion in cash. It cost $5 billion to run the business for those three months. When Starbucks next reports revenue it won’t be close to last quarter’s $7 billion. Remember, the March quarter saw the heart of the disaster in China, its second-largest market.
The June quarter is going to be even worse. China will be coming back online. But it may be some time before Chinese consumers are comfortable lounging together. It will certainly take time for them to start spending $4.80 for a cup of coffee again.
For now, Starbucks is doing everything it can to be a good citizen. It’s paying people into May whether they show up or not. It’s giving coffee to first responders. Its employees are making masks.
But it’s clear America’s response to the virus is nothing like China’s was. The “lessons” CEO Kevin Johnson says he learned from China may not apply here. We may be in for a much longer shutdown.
For that reason I find the idea of buying Starbucks after its 3% Luckin “relief rally” ridiculous. Employees are already asking it to close stores completely, admitting that coffee “is not essential.”
That may be true for coffee bought by the drink in a store. But take it from this freelance journalist, coffee is still essential.
Thereby hangs a tail.
A Nestle Bailout?
If things get very tight, and I think they will, there may be a way out for Starbucks.
Starbucks sold its packaged coffee business to Nestle (OTCMKTS:NSRGY) in 2018. At the time it was considered a masterstroke. The $7.2 billion went back into opening stores.
The only product sales from which Starbucks gets a retail profit now are those made in its stores. On others it gets the equivalent of a royalty. Thanks to Starbucks, Nestle also has an easy path to pushing its Nespresso coffee machines on Chinese businesses. Those machines might be stocked with Starbucks-branded pods, but they also reduce in-store sales.
This does not make SBUX stock a buy, except perhaps for Nestle. Nestle has a $307 billion market capitalization and is doing well enough to keep up its dividend. As of April 3, Starbucks had a market cap of $74 billion. If a lifeline is needed, there may be one there. But the depth of the problem will have to become clear to investors before it’s offered.
The Bottom Line on SBUX Stock
Starbucks is in triage mode right now. It is trying to save its reputation.
This is a good thing. But it may not be enough to survive as a stand-alone company. It’s certainly not worth $74 billion.
If I were a short-seller, and I’m not, I might consider buying puts on SBUX stock here.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
