On May 1, Starbucks (SBUX 0.15%) broke above $115 per share and was up over 15% year to date (YTD). Fast forward to today, and Starbucks stock is actually down roughly 2% YTD despite putting up incredible results (and it’s now down almost 15% since May 1).
Let’s see if investors are making a mistake by selling the blue chip dividend stock, or if there are issues that merit a sell-off.
Starbucks is finding its footing
Between 2015 and 2018, Starbucks stock was extremely steady — mostly hovering in the $50- to $60-per-share range. The U.S.-China trade war and questions surrounding Starbucks’ long-term future in China weighed heavily on the company and kept investors wary.
But then, Starbucks stock had a breakout 2019 and was up over 50% by late July, only to give up some of those gains to close the year up 36.5%. It was a huge turning point for the stock, marked by record earnings and plenty of enthusiasm for Starbucks Rewards and Mobile Order and Pay.
Then, the COVID-19 pandemic sucked the wind out of Starbucks’ sails and sent the stock right back down to the range it was stuck in before 2020. Starbucks depends heavily on folks commuting to work, traveling, and being out and about. So it’s no surprise that Starbucks suffered a massive decline in sales and profits during the pandemic.
The silver lining was that the pandemic offered the chance for Starbucks to double down on mobile grab-and-go and drive-thru orders. Starbucks used the pandemic as a chance to renovate stores, add mobile pickup areas and drive-thrus, and close some coffeehouse-style stores without drive-thrus. It was a controversial decision that strayed from Starbucks’ heritage that centers around the in-store experience. But this strategy offered the best way to lean into Starbucks’ leading app and loyal customer base.
Over the last year, Starbucks has proven that the pandemic was merely a blip on an otherwise solid growth trajectory. If you look at a 10-year chart of Starbucks’ trailing-12-month (ttm) revenue and normalized diluted earnings per share (EPS), the pandemic quarters look like a temporary gap that was quickly filled as Starbucks resumed its slow, steady trend up and to the right.
Realizing Starbucks was back in the saddle, investors aggressively bought the stock in 2021 where it made an all-time high above $120 a share, only to collapse back down to the low $70s in early 2022, stage a recovery, and then knock on that door of that all-time high this summer.
Normally, it’s not a good idea to fixate too much on a stock’s price action. But for a company like Starbucks, which has transformed itself from a growth stock into a stable stalwart of a dividend stock, the volatile price action is fairly extreme. And it shows that investors don’t exactly know how to value Starbucks.
Should the stock go back down to somewhere in the range of its rip-roaring year in 2019, or does it deserve to break out to a new all-time high? To answer that question, we need to look at where Starbucks is today versus where it was pre-pandemic.
A far better company
In Q3 fiscal 2023, Starbucks reported over 75 million 90-day active Starbucks Rewards members, including 31.4 million in the U.S. and over 20 million in China. For Q1 fiscal 2020, which Starbucks reported in January 2020 before the pandemic hit, Starbucks had 18.9 million Starbucks Rewards members, including 10.2 million in China.
There’s no getting back the sales and profits that Starbucks lost during the pandemic years. But the company’s ability to quadruple its 90-day active Rewards members in just three and a half years is an incredible feat and something that should drive lasting long-term value for years to come.
In Starbucks’ latest quarter, Starbucks Rewards members made 57% of sales in the U.S. — illustrating the importance of this core customer base. Mobile ordering is a win-win for Starbucks and its customers. Starbucks sells more drinks and food items, boosting the output of each store. Meanwhile, customers are happy because they can shorten or even eliminate their wait time, customize drinks accurately, and gain rewards to save money.
Another interesting data point is the change in Starbucks stores. In the recent quarter, Starbucks finished with 37,222 stores, 17,592 in North America, and 19,630 international. As of that pre-pandemic quarter in Q1 fiscal 2020, Starbucks actually had more stores in North America at 18,203, but over 30% fewer international stores with just 13,592 for a total of 31,795 stores.
Starbucks is executing a deliberate plan to focus on international growth led by mobile ordering and growing its Rewards base. And the numbers prove it is working extremely well.
Starbucks’ stock has a clear but regimented path higher
Although Starbucks has more than recovered from the pandemic, it’s not the growth stock it once was. Rather, it’s a reliable blue chip dividend stock with an excellent game plan to steadily grow earnings and boost its dividend.
For that reason, it makes sense why investors backpedaled and sold Starbucks stock after its big run in 2021 and earlier this year. After all, Starbucks has a 29.6 price-to-earnings ratio, which isn’t cheap by any means. And it doesn’t have the breakneck growth rate to support an expensive valuation.
Starbucks is one of those stocks that deserve to go higher as its fundamentals catch up with its valuation. But it’s also not the kind of company that investors don’t have to race to buy. With a 2.2% dividend yield and a powerful brand, Starbucks is reliable is a worthy candidate to dollar-cost average into over time.