Shares of the Seattle-based coffee firm Starbucks (NASDAQ:SBUX) have been left behind amid the stock market’s explosive rally, now down 14% year-to-date compared to the 16% gain of the broader S&P 500 (SPX). Despite numerous overwhelming headwinds, I view SBUX stock as way oversold and worth a sip on the recent dip for investors brave enough to catch what now seems to be one of the fastest-falling knives in the entire restaurant space.
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Undoubtedly, Starbucks is continuing to find itself in hot water of late, whether we’re talking about the global boycotts due to Starbucks’ stance on the Israel-Hamas war, the overhang from barista unions, or just the curbed taste for incredibly expensive coffee amid inflation. Personally, I think the bar is low enough after a rough recent quarterly earnings implosion, especially with new catalysts on the horizon that could win back customers.
Starbucks Stock: Staging a Comeback after Nightmare Quarterly Flop
Now down 37% from its 2021 all-time high, the former market darling is struggling to regain ground under the new leadership of its new CEO, Laxman Narasimhan. Questions linger as to what can help caffeinate SBUX stock again after one of its ugliest quarterly showings in recent memory. Just how bad was the quarter? Enough to “stun” Mad Money host Jim Cramer.
Although shares have regained quite a bit of ground (almost 10%) from the post-earnings crash that wiped out more than 15% of value in a day, there doesn’t seem to be a whole lot to look forward to right now.
Indeed, there are notable positives (a potential recovery in China and a supply-chain cost savings plan of $4 billion over four years), but the negatives clearly outweigh them and could continue to do so until something drastic happens. If things don’t start improving fast, perhaps Howard Schultz will be forced to give yet another encore, returning to the helm to clean up a mess that nobody else may know how to.
Narasimhan Needs to Double Down on Value to Win Back Customers
Undoubtedly, Narasimhan’s first year as CEO of Starbucks has been unremarkable. However, to be fair, he stepped in at an inopportune time, as inflation weighed heavily on consumer spending while the rest of the restaurant scene felt the pinch. Only time will tell if Narasimhan can give consumers enough of a value proposition to win back their business.
Clearly, investors don’t see the “value” in continuing to spend a great deal at the arguably overpriced coffee chain right now. However, things could quickly change once the economy improves. With new menu innovations and a potential value menu like other quick-serve restaurant firms, Starbucks might attract more cost-conscious consumers. Menu innovations are great, but consumers want bang for the buck, and as Starbucks serves up the deals, it may also be able to nudge its stock back to $100 per share.
Indeed, consumers crave value menus these days, but Starbucks must be careful not to erode its status as a premium brand. I think it can walk the fine line as value menu season kicks off for the summer season. Reportedly, Starbucks is offering a value-rich breakfast combo, which offers coffee and the choice of a croissant (starting at $5) or a sandwich for a dollar more. These value combos are a fantastic addition that may just win back that morning crowd.
Starbucks Could Get Moving with Latest Delivery Deal
Starbucks may be able to jolt sales growth as it doubles down on coffee delivery with food-delivery service provider Grubhub. The latest Grubhub deal now makes it all too easy for those working from home (WFH) to order their favorite Starbucks brews, with the coffee giant now on all the top food delivery platforms.
With a strong ad campaign, the customer now knows they can get Starbucks in as little as a few taps on their phone. For the summer season, this food-delivery tailwind could be a massive boon as customers order the latest iced drinks for what’s looking to be a scorcher of a summer, provided that delivery firms are fast enough to deliver the drinks before the ice melts.
In the last quarter, Starbucks deliveries were a notable bright spot, with double-digit growth in the U.S. region, something Meg Mathes, Starbucks’ VP of digital experiences, recently touted. As consumers feel good about splurging again, perhaps meeting customers at home could be key to saving SBUX stock before year’s end.
Either way, the stock looks undervalued at 20 times forward price-to-earnings, close to the lowest it’s been in the past year.
Is SBUX Stock a Buy, According to Analysts?
On TipRanks, SBUX stock comes in as a Moderate Buy. Out of 26 analyst ratings, there are eight Buys and 18 Hold recommendations. The average SBUX stock price target is $88.78, implying upside potential of 9.2%. Analyst price targets range from a low of $75.00 per share to a high of $112.00 per share.
The Bottom Line
Starbucks stock is trying its best to climb out of a historic rut after one of the worst quarterly disappointments in a while. With tasty iced drinks, a solid $5-6 value menu, a four-year $4-billion cost savings plan, and another delivery partner aboard, there’s no shortage of potential recovery drivers that could power SBUX stock from here.
The only question is whether Narasimhan can deliver the value that gets loyal consumers to open their wallets again.
