Few companies embody American capitalism and global reach quite like Starbucks (NASDAQ:SBUX). Easily rivaling iconic brands like McDonald’s (NYSE:MCD) or Coca-Cola (NYSE:KO), investors can usually rely on SBUX stock for stability. However, the novel coronavirus challenged that notion, sending shares plummeting due to the nationwide lockdown. Yet optimists believe in Starbucks thanks largely to the China catalyst.
Although the coronavirus originated in the world’s second-largest economy, it was also one of the first nations to recover from the crisis. As the country reopened, it laid down an unofficial blueprint for others to follow. Additionally, the bulls reasoned that once the pandemic faded into the rear-view mirror, China’s transition toward a coffee-drinking culture would bolster SBUX stock.
I believe this is still the right idea. Nevertheless, this thesis has admittedly taken a sizable hit. First, reports suggest that Chinese consumer confidence is down. Specifically, retail sales in discretionary categories such as apparel, jewelry and household appliances are still languishing in the doldrums.
Obviously, this dynamic has poor implications for SBUX stock. Without vibrant demand leading to high-volume foot traffic, Starbucks’ business model suffers. In addition, the company relies on the social experience. But because we live in the age of social distancing, that doesn’t fly right now.
Second, U.S.-China relations are hitting a low point at just the wrong time. For instance, President Trump announced that the U.S. will terminate its relationship with the World Health Organization, citing its close and enabling relationship with China as a contributing factor.
While this news may embolden the President’s supporters, it sent a chill to the business community. After all, the trade war preceding this mess wasn’t exactly the most popular initiative.
Underappreciated Tailwinds Support SBUX Stock Amid Chaos
Again, I can see why some investors are shying away from Starbucks as an investment. It’s hard not to look at the year 2020 and wonder if it’s cursed. However, it’s also important to realize that these challenges — though incredibly difficult — are temporary.
Yes, some consumer-related data from China doesn’t exactly look favorable. But this is also a fluid situation. As people around the world acclimate to the new normal, they will gradually adapt, shedding their prior concerns.
Indeed, we already saw evidence of this when Disney (NYSE:DIS) opened Shanghai Disneyland. Within minutes, available tickets were sold out. Keep in mind that besides China being once the epicenter of the Covid-19 pandemic, Shanghai itself is a high-density city. Health risks abound, yet visitors there were more than willing to accept them.
Another reason to stay optimistic toward SBUX stock is the aforementioned consumer shift toward coffee. Over the last several years, coffee consumption in China has grown substantially. While you might see a temporary impact due to the coronavirus, the trajectory will likely remain positive.
Moreover, I wouldn’t let the geopolitical drama dissuade you from SBUX stock. During the height of the trade war last year, Chinese nationalist provocateurs ridiculed brands like Apple (NASDAQ:AAPL). Yet when it came time to open their wallets for the Singles’ Day shopping festival, Chinese consumers overwhelmingly chose American brands.
From this, it appears that most Chinese people can intelligently separate the emotions of nationalism in their purchasing decisions. I don’t see anything about the coronavirus situation that would make me change my decision.
In fact, when you look at China’s capitalistic development, their consumers’ motivations — such as showing off their success — mirrors that of American consumerism. Ultimately, this should insulate Starbucks from geopolitical turmoil.
It’s Not All About China
While I’m encouraged at the long-term developments in the Asian powerhouse, we shouldn’t forget about the core North American market. Obviously, with most states initiating reopening protocols, this will provide a boost for SBUX stock.
Furthermore, even if we must trudge through some rough economic waters, Starbucks represents a (relatively) cheap thrill. Specializing in caffeinated beverages, their pick-me-up-in-a-cup business model has suddenly become much more relevant. Certainly, their products are much better for health than say drinking alcohol or smoking cigarettes, which have become popular coping mechanisms during the quarantines.
Granted, the present social unrest, which has been sparked by nationwide calls for equality and justice, presents some nearer-term risk to SBUX stock. Although the country is deeply divided, it’s not something that we can’t solve. Historically, we’ve been through terrible times, yet we’ve come out the other end better for it.
Besides, being in an election year, change is potentially right around the corner. But what won’t change is deeply ingrained consumer habits. That’s why you can trust Starbucks, even if your immediate instincts tell you not to.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
