Starbucks (NASDAQ:SBUX) has started 2022 on a weak note as its shares have lost 30% year-to-date. The bearishness in SBUX stock continues today, most recently with a downgrade by Citi of Starbucks from Buy to Neutral. With that in mind, should investors be concerned with this downgrade and sell SBUX?
Most of Citi’s arguments for the downgrade make sense. But not all. Citi believes that labor shifts will present risks to the profitability of the chain-coffee for several years and the resurgence of Covid-19-realted issues will have an impact on the company. Citi also notes that inflation will be an issue for SBUX stock moving forward.
I don’t really agree with the labor shifts being an issue for the company. After all, these shifts come because of broader changes in the population, changes in preferences and changes in wage rates. With the pandemic now closer to an end, even though we have not reached there yet, Starbucks offers a lot of flexibility in its labor shifts that should make both its employees and customers happy.
I do not see unionization as a severe problem either, as Starbucks has announced increases in its starting wage and its average hourly rate.
The ESG initiatives could benefit Starbucks rather than harm it as they entail a broader scope of issues related to climate change, equal opportunities and business ethics. These values make a strong corporate culture for Starbucks, one that its customers and investors will appreciate rather than be concerned about.
However, the arguments that I fully agree with Citi are the ones of inflation pressures and the resurgence of coronavirus in China with local lockdowns. These two factors will harm Starbucks’ profitability, but the lockdowns should be more transitory. Inflation, on the other hand, is at historic highs in the U.S. market and it is negative for Starbucks in many ways, from rising material costs to transportation of goods.
Citi has presented several factors for this downgrade, but its argument could have been much simpler. Rather than state these reasons, it could have mentioned valuation concerns about SBUX stock, and it would have been right. SBUX stock is expensive now by analyzing many key metrics. Avoid it not just for this Citi downgrade.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.