Ahead of Earnings, Buy the Dip in Starbucks Stock

Since mid-April, all’s been quiet for Starbucks (NASDAQ:SBUX), at least in the equity market. SBUX stock saw a brief rally in early June, but that aside has stalled out.

the Starbucks (SBUX) logo on a sign outside of a coffee shop
Source: Grand Warszawski / Shutterstock.com

I expect that will change soon — and possibly next week. Starbucks reports fiscal third-quarter earnings on Tuesday afternoon. And that release should be a catalyst for Starbucks stock.

To be sure, the numbers in the U.S. are going to be soft. But as economies worldwide reopen, Starbucks should see improvement. That’s particularly true in China, a key market for the company and one with a suddenly wounded competitor.

This is not a quarter that, fundamentally, will look impressive. But I expect there will be enough to remind investors that Starbucks is one of the world’s great companies. With SBUX stock down about 17% year-to-date, that should be more than enough.

Business Should Improve

Again, consolidated third quarter numbers are not going to look impressive. In fact, they’ll likely be downright ugly. Wall Street expects revenue to decline a stunning 40% year-over-year.

Of course, that’s not a surprise. Starbucks stores were closed for several weeks in the quarter. Even after reopening, locations are operating at reduced hours. Like McDonald’s (NYSE:MCD), another restaurant stock with long-term upside, Starbucks simply is playing the hand it was dealt amid the novel coronavirus pandemic.

And like McDonald’s did with its Q1 report in April, Starbucks should give some detail on sales figures. I expect that detail will show a steady improvement in June, in particular, as Western economies started to recover.

After all, consumers need their coffee, whether they’re working from home or in an office. They’re not going to stay away forever, or even for long.

Given Starbucks’ dominance of the market, improvement should be enough to drive some optimism. For Starbucks stock to rally, investors need to get back to focusing on the long-term case, and earnings should give investors a reason to do so.

Focus on China

Of course, Starbucks isn’t just a U.S. company. Overseas markets accounted for about 30% of revenue in fiscal 2019, according to the company’s Form 10-K filed with the U.S. Securities and Exchange Commission.

And one of the key growth markets — maybe the key growth market — is China. There, the news likely will be better.

After all, China dealt with the coronavirus first, and is recovering first. Meanwhile, rival Luckin Coffee (OTCMKTS:LKNCY) is dealing with a massive accounting scandal that led to the departure of multiple executives.

Starbucks has a big opportunity to cement its lead in China. That alone can be a game-changer for the stock. If Starbucks numbers show progress on that front, and suggest market share gains from Luckin, SBUX stock is going to rally after earnings.

The Case for Starbucks Stock

All told, Tuesday’s report won’t be one where a “beat” or “miss” relative to Street expectations is going to drive Starbucks stock. Rather, it’s the context, and the commentary, that are going to matter.

Again, all Starbucks needs to do is remind investors of why SBUX has been an unbelievable investment over time (+22,000% since its 1992 initial public offering). It needs to give the market reason to look beyond the soft Q3 to what should be improving results going forward.

Starbucks is facing the same short-term headwinds as companies like Chipotle Mexican Grill (NYSE:CMG) and Dunkin’ Brands (NASDAQ:DNKN). Yet its long-term performance has been just as good, if not better. That in turn suggests that SBUX stock has more upside.

I think there’s a good chance that next week’s earnings report proves a catalyst to narrow the gap between SBUX and other restaurant operators. But even if that’s not the case, the long-term case is solid. Normalcy will return, and Starbucks will benefit. That gives Starbucks stock a path to get back to or even beyond its past highs.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.  

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