Starbucks stock price nears a pivotal level: 15% drop likely

Starbucks (SBUX) stock price has been a big laggard in the past few years. Its stock has dropped by over 22% in the past five years while the S&P 500 index has jumped by over 83% in the same period. This drop means that $10,000 invested in the company at its top in 2021 would now be worth $6,410. 

Starbucks is growing but challenges remain

Starbucks, the biggest coffee chain company in the world, is still growing, helped by its store additions and the fact that more people are taking its products.

As a result, its annual revenue has jumped from over $26.5 billion in 2019 to over $35 billion in the last financial year and $36 billion in the trailing twelve months (TTM).

The company is also growing its annual profits, which have moved from over $3.5 billion in 2019 to over $4.1 billion in the last financial year.

However, the reality is that the company faces substantial challenges that have made it a fallen angel. It is no longer growing as fast as it did before in China, its fastest-growing market.

China is a crucial market because of its vast population and the growing purchasing power. Over the years, Starbucks has opened over 6,500 stores in the country and it plans to continue this trend in the coming years.

However, China has now become a more difficult market for Starbucks because of the rising competition. Luckin Coffee, a Chinese company, has been growing aggressively in the country and has already opened over 10,000 stores in the country. 

Most notably, it is now competing with companies in the bubble tea industry that is becoming more popular in the country. Other companies that are growing rapidly in China are leading brands like Dunkin, Costa Coffee, Pacific Coffee, and Seesaw Coffee.

One of the top challenges that Starbucks is facing in China is that it is an American company at a time when relations between the two countries are not doing well. As a result, many people in China have leaned towards Luckin, which offers premium brands in the country. 

Starbucks is facing other challenges even in the United States, where wage growth has been growing. Just recently, California passed a new bill that has pushed the minimum wage to $20 a hour, meaning that its costs are rising.

Starbucks recent quarterly update

The most recent financial results showed that Starbucks published relatively weak financial results. Its North American revenue rose by just 1% to $6.8 billion as its operating margin fell by 70 basis points to 21%. Same store sales also dropped by 2% while the ticket change fell by 6%. 

In the international segment, same-store sales dropped by 7% last quarter as its revenue dropped by 7% to $1.8 billion. This revenue drop was notable since the company had more stores in the region than in the same period in 2023. The total store count rose from 19,630 to 21,279. In China, comparable sales dropped by 14% during the quarter. 

Turnaround will take time

Starbucks is hoping that the current headwinds will end and that the company will return to growth. However, the reality is that Starbucks has been going through a turnaround for a long time, a move that saw Howard Schultz return to the company in 2022 after four years. He left after the company named Laxman Narasimhan as the new CEO. 

As part of Laxman’s turnaround efforts, the company has partnered with Grubhub in a bid to grow its takeaway business. It also launched Starbucks Studios, a new initiative to create content for the company. The company has also announced plans to layoff some of its workers in the Middle East.

Still, I believe that the company’s turnaround will take time to execute because of the company’s challenges. Some analysts believe that it needs to execute more layoffs, especially in the United States, where its growth is slowing. 

The other big issue for the Starbucks stock is that it is still overvalued for a company that is no longer growing. It has a forward PE ratio of 21, higher than the sector median of 16. 

Starbucks stock price forecast

The weekly chart shows that the SBUX stock price has been in a strong bearish trend in the past few months. This decline started as the stock peaked at $112 a few years ago. Most importantly, the stock has formed a death cross as the 200-week and 50-week moving averages have formed a bearish crossover. 

It is now hovering slightly above the key support level at $71.46, its lowest swing in May. Therefore, the stock will likely continue falling, especially if it drops below the key support level at $71.46. If this happens, the next point to watch will be at $65, its lowest swing in May 2022 and 15% below the current level.