Is it time to sell Starbucks stock as it enters price war in China?

By:
on May 28, 2024
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  • Starbucks faces a price war in China, hurting sales.
  • Stock trading near its two-year lows.
  • Key support at $82 becomes resistance for investors.

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Starbucks Corp (NASDAQ:SBUX) is facing a tough battle in China, its second-largest market, according to a recent report from Reuters. The company has been forced into a price war with low-cost rivals, such as Luckin Coffee, despite previous attempts to avoid such competition. This strategic shift comes as Starbucks’ sales in China have declined, leading to increased use of discount coupons to attract budget-conscious consumers.

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Financial performance under pressure

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The company’s recent financial performance has been underwhelming. In the second quarter of 2024, Starbucks reported a significant drop in same-store sales in China, down 11%. This decline contributed to a downward revision of its annual sales forecast, further dampening investor sentiment. The broader economic environment in China, marked by weak consumer sentiment and stagnant wages, has exacerbated Starbucks’ challenges.

Starbucks’ stock has taken a hit, trading near its two-year lows. On April 30th, the company slashed its full-year guidance, causing a 16% plunge in its stock price. This downturn has raised questions about Starbucks’ ability to maintain its market position and profitability amid growing competition and economic headwinds. Some analysts have even suggested that Starbucks might become a target for activist investors seeking to drive strategic changes.

Potential for a rebound?

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Despite these challenges, Starbucks remains a major player in the global coffee market. The company operates nearly 39,000 stores worldwide, with a significant presence in the United States and China. However, recent missteps and a challenging economic environment have put pressure on its business fundamentals.

Former CEO Howard Schultz has called for a renewed focus on improving customer experience, particularly in U.S. stores, to regain momentum. Valuation concerns are also at the forefront for investors. The stock’s recent performance and reduced guidance have led to increased caution among analysts.

While some see potential for a rebound, others highlight the risks associated with Starbucks’ current strategy and market conditions. The company’s long-term growth prospects remain attractive, but near-term uncertainties suggest a cautious approach.

Now, let’s delve into the technical analysis to better understand Starbucks’ stock performance and potential future trends. Given the company’s recent strategic challenges and economic headwinds, examining the charts will help us assess whether the current low valuations present a buying opportunity or if further declines are imminent.

The battle for $82: Key support becomes resistance

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In our previous article on Starbucks, ‘Starbucks stock: A new low or a turning point?’, we had highlighted how $82 was a crucial support for the stock:

“While the prevailing sentiment favors bearish control, optimistic investors may consider establishing positions at this juncture, banking on a potential turnaround. Maintaining a close eye on the daily charts and ensuring that the stock remains above the $82 support level is crucial for those looking to capitalize on a potential upward movement.”

SBUX chart by TradingView
Following the company’s Q1 results on April 30th, the stock opened below $82 and has so far not been able to cross above it, turning that level into a short-term resistance stock. Investors who want to bet on Starbucks’ turnaround and traders bullish on the stock, must avoid buying as long as it trades below $82.

Traders who continue to be bearish on the stock can take a low-risk high high-reward trade by shorting the stock near $80 and keeping a stop loss at $82.6. If the stock continues its downward journey its next immediate support lies at $70.3, where one can book profits.

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