Down 35% in 2022, Is Starbucks Stock a Buy Right Now? | The Motley Fool

Amid the market slump in recent months that has crushed fast-growing, high-multiple tech stocks, a blue-chip ticker like starbucks (sbux 0.96%) has been engulfed in chaos. Shares are down 35% this year alone, causing many shareholders to consider running for the exits.

However, I think pessimism presents astute investors with a buying opportunity in this household name. Here are three reasons why Starbucks is a solid investment right now.

Reading: Is sbux a good stock to buy

strong brand as a competitive advantage

For starters, Starbucks possesses a powerful competitive advantage that is intangible in nature, making it extremely difficult (or impossible) for a rival to replicate. I’m talking about the company’s globally recognized brand. According to piper sandler‘s spring 2022 evaluation survey with teens, starbucks was in the top three in the restaurant category among the generation z demographic. This is a lucrative place to be because these younger consumers have the potential to be lifelong Starbucks customers.

starbucks gross margin of 27.9% over the last 12 months indicates consumers’ propensity to pay for what they consider to be a premium food and beverage product. Such a high margin gives the company wiggle room when it comes to absorbing higher input costs while maintaining profitability.

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Throughout the inflationary environment that the us. has been enduring, starbucks has been able to raise prices steadily without negatively affecting demand. “Over the past year, we have raised prices multiple times to address rising inflationary pressures,” founder and interim CEO Howard Schultz said on the second-quarter 2022 earnings call. “However, we experienced negligible loss of customers, demonstrating once again the elasticity of demand for Starbucks coffee.

Legendary investor Warren Buffett believes that the most telling sign of a quality company is the presence of pricing power. starbucks checks the box in this category.

walkway to open more stores

despite the ubiquity of starbucks today, with 34,630 stores worldwide, management believes there is ample opportunity to further increase the retail footprint. By 2030, executives project there will be 55,000 Starbucks locations in 100 different markets. that’s still a long stretch track.

The United States, which accounts for 67% of total revenue, is experiencing record levels of demand, prompting Schultz to suspend share buybacks to direct capital investment toward accelerating store openings, with a focus on creating self-service. Although there are currently 15,544 stores in the United States, experimenting with new methods of serving customers in ways that are most convenient for them will further the dominant position of Starbucks.

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China, unsurprisingly, will be the biggest growth engine for the rest of the decade. Starbucks will eclipse 6,000 stores in the country by the end of this fiscal year. populating massive urban areas with smaller digitally enabled outlets will help fuel sales growth. Rachel Ruggeri, the company’s chief financial officer, says executives “remain very optimistic about our future growth in China.”

A larger store footprint will allow the business to leverage its expenses as revenue grows, supporting higher levels of profitability over time. Coffee is a lucrative business because it is universally loved and lends itself to repeat buying behavior, which puts Starbucks in an advantageous position.

valuation is attractive

With the stock falling in 2022, the stock is trading at an attractive P/E ratio of just over 20. Not only is that close to the lowest level Starbucks has sold at in the past decade , but the stock is also at a slight discount to the s&p 500 p/e ratio of 21. given the strong brand and growth opportunity, it can be argued that starbucks is a better deal than the average company, which guarantees a higher valuation than the s&p 500.

wall street consensus analyst estimates call for earnings per share to increase 12.2% per year from fiscal 2021 to fiscal 2026. combine this with a deservedly higher multiple and the potential for above-market returns definitely exist.

The beauty of owning starbucks stock is that it’s a forever type of investment. Serving consumers with premium-priced coffee and food doesn’t really invite much technological disruption, and the slow-changing nature of the industry benefits the business and its durability over time.

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