By Bernstein upgraded Starbucks Corporation (NASDAQ: SBUX) to an Outperform rating from Market Perform on September 26, 2024, while raising its price target from $92 to $115.
This move points to a renewed optimism around the company, largely driven by confidence in CEO Brian Niccol’s ability to execute a turnaround.
Niccol’s experience in reviving brands like Taco Bell and Chipotle is seen as key to addressing Starbucks’ operational challenges.
Bernstein’s new target reflects a potential 20% upside, underpinned by lower G&A expenses, organizational streamlining, and a shift in focus towards operational stability.
Starbucks’ potential also hinges on recovery in key markets like China, where the company faces pressure but is expected to benefit from partnerships or spin-offs.
The firm’s vision includes improving food offerings, navigating macroeconomic challenges, and capitalizing on lower interest rates. The stock continues to enjoy a consensus Buy rating across Wall Street, though not all analysts are bullish.
Jefferies downgrades Starbucks over union concerns
Jefferies, notably, downgraded Starbucks to Underperform just two days earlier, warning that Niccol’s strategy, while promising, may not yield immediate results.
They cited concerns over challenges like unionization and operational hurdles.
Jefferies’ price target of $76 sharply contrasts with Bernstein’s, reflecting skepticism about near-term earnings and guidance for FY25, which they anticipate will underwhelm.
The broad disparity in analyst opinions highlights the complexity Starbucks faces in its turnaround effort.
Recent developments also include leadership changes, with Starbucks’ North America CEO Michael Conway stepping down in September 2024.
Conway’s departure further consolidates Niccol’s control over the company, as the role will not be filled.
This decision is expected to streamline Starbucks’ operations but comes at a time when the company is juggling labor negotiations and efforts to address union-related tensions, which have been a point of contention.
Starbucks Q3 revenue falls short, China sales drop 14%
Financially, Starbucks reported $9.1 billion in revenue for its Q3 FY24, slightly missing expectations by $150 million.
Global comparable store sales declined 3%, with North America falling by 2%, and China by 14%.
While the company opened 526 net new stores, these figures reflect the current struggles to reignite foot traffic and maintain growth, particularly in China.
With competition rising and macroeconomic pressures still affecting discretionary spending, the outlook remains cautious for FY25.
Competition and costs weigh on Starbucks’ growth outlook
Starbucks’ valuation has been a contentious point. With its forward price-to-earnings (P/E) ratio at 26.9x, the stock trades above its sector peers, yet below its five-year average of 35x.
Despite the pullback, the premium multiple suggests investors remain optimistic about Niccol’s ability to steer the company back to growth.
However, some analysts argue that the current price already factors in much of the optimism surrounding the CEO change, and additional risks like rising labor costs and competition could limit upside potential.
While many view Starbucks’ brand strength as an enduring asset, particularly in international markets, it faces mounting competition from both local and global players.
Companies like Luckin Coffee in China and McDonald’s in the US are eating into Starbucks’ market share, which adds pressure to the company’s margins and growth trajectory.
Starbucks’ ambitious plans for digital expansion and menu revamps are promising but will require careful execution to restore investor confidence.
All eyes are on how Starbucks will navigate its transformation, particularly with regard to managing costs and improving its value proposition without alienating its customer base.
With this backdrop in mind, let’s now turn our attention to the charts and see what they reveal about the potential price trajectory of Starbucks stock moving forward.
Has the long-term downtrend ended?
Starbucks’ stock reached its yearly high above $125 in July 2021 but then entered a long-term downtrend.
Source: TradingView
However, that downtrend appears to have ended last month, following a record surge driven by the new CEO appointment.
What’s signaling strong upward momentum is that, despite last month’s surge, the stock hasn’t retraced much and continues to hit new highs.
Investors could consider entering long positions at current levels, with a stop loss set below the recent swing low of $90.18.
If the uptrend continues, the stock could soon retest the $125 level.
On the flip side, bearish traders have a low-risk opportunity with the stock trading near short-term resistance around $107.
They could initiate short positions near $100, placing a stop loss at $107.30. If bullish momentum weakens, the stock may drop below $90.
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