Starbucks: Negativity Overblown; Long-Term Story Still Intact

Shares of popular coffee chain Starbucks (SBUX) have been sinking steadily lower over the past several months. Adding to its woes was the broader market sell-off and the release of some pretty underwhelming quarterly numbers that missed on the bottom line.

The initial post-earnings reaction was incredibly negative, with SBUX stock sinking nearly 5% lower in the after-hours of trading before posting a partial recovery to around $98 per share. I am bullish on SBUX stock.

There’s no question that Starbucks has felt the impact of COVID-19 and the latest Omicron variant. While many firms have been able to shrug off the COVID-19 woes in recent months, the nature of Starbucks makes it hard to escape waves without sustaining some considerable damage. Indeed, caffeine is the major draw of Starbucks, not so much its food items, making the firm a big loser of the shift towards a hybrid or remote work environment.

As the pandemic ends and Omicron cases dwindle, the reopening trade and Starbucks stock could quickly heat up again. For now, it’s been mostly pain for the Seattle-based coffee behemoth.

Omicron Delivers Blow to Starbucks Stock

It’s been a perfect storm of headwinds that’s cooled off Starbucks. For now, it remains uncertain as to when the storm will end. In due time, I do think it will end (likely when the pandemic goes endemic), and the power of the brand will shine through. For that reason, I remain bullish on Starbucks stock over the long run. It’s a great company with a wonderful brand that’s been dealt a tough hand that it will need to play better in 2022.

From the negative comps in China to COVID-19-induced labor issues and rampant inflation to questionable coffee quality, Starbucks hasn’t yet had the answers.

While there’s no easy way out for Starbucks amid recent turmoil, I do think the selling pressure on SBUX stock is overdone, making it an intriguing contrarian bet for those willing to hold through what could be another year of turbulence.

The short- and medium-term could remain challenging. Still, the long-term story and growth narrative, I believe, has not changed too much.

Starbucks Stock Drops Following Q1 Earnings Miss

Starbucks clocked in $8.1 billion in net revenue, up 19% year-over-year. U.S. comparable sales were up 18%, international comps fell 3%, and China comps dropped 14%. Higher labor and commodity costs made Starbucks feel the pinch of the inflationary environment. Though the firm did pull back on marketing expenses to help ease swelling expenses for the quarter.

Undoubtedly, the sales weakness in China was a major reason many were so quick to throw in the towel on the stock. China is a significant source of long-term growth, and such a vicious comps decline was concerning, to say the least.

Still, Starbucks has already been severely punished, down over 23% from its all-time high of $126 and change per share. The China slump may also prove to be temporary, as coronavirus restrictions gradually ease and people start heading back to the office.

Although inflation hit the firm straight on the chin, I do think it has the means to get back up again and weave through what could be another tough year of upward pressure on costs. The Starbucks brand is magnificent, and with that, it has pricing power.

Now, the premium coffee chain has always commanded a pretty penny for its drinks. As conditions normalize and foot traffic improves, in China particularly, I’d look for Starbucks to begin passing on higher costs to its consumers.

In China, where American brands are trendy, I don’t see too much of a sales loss if Starbucks really raised the bar on its prices. For now, it seems like COVID-19 is making it hard for Starbucks to dodge the hit of inflation. That said, I do think a majority of Starbucks’ issues are temporary and tied to COVID-19 rather than originating through faults of management.

Wall Street’s Take

Turning to Wall Street, SBUX stock comes in as a Moderate Buy. Out of 25 analyst ratings, there are 13 Buys and 12 Hold recommendations.

The average Starbucks price target is $116.22, implying an upside potential of 21.1%. Analyst price targets range from a low of $100.00 per share to a high of $136.00 per share.

The Bottom Line on Starbucks Stock

Starbucks is under pressure and the recent quarter was slightly concerning. Despite the issues and weakness in the Chinese market, I still think SBUX stock is worth a premium.

Once the pandemic ends, the pathway could be cleared for the firm to make a move towards all-time highs. In the meantime, the company will need to manage through what could be another few waves of restrictions in select markets.

Further, given recent labor challenges, one has to think that Starbucks is looking to accelerate its automation efforts. Such efforts could really pay off big-time over the long run, especially if it takes a page out of the playbook of Amazon (AMZN), a behemoth it teamed up with last year to open a cashier-less café in Manhattan.

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