Coffee giant Starbucks (SBUX 2.97%) is celebrating its 50th anniversary in 2021, but the company isn't acting its age. Despite its massive size, it's still growing like crazy, which may explain why the stock is so popular among users of the brokerage app Robinhood, where it's among the top 100 most-held stocks.
In my opinion, Starbucks meets three important criteria that investors should think about when picking stocks. Other companies in Robinhood's top 100 might check one or two boxes, but Starbucks is the total package. This makes it my top Robinhood stock to buy right now. Here's why.
Image source: Starbucks.
1. Its an easily understood path to market-beating returns
Today, Starbucks has 33,000 locations. By 2030, it plans to have 55,000. These 22,000 new locations will backfill existing markets, break into new territories, and include (where appropriate) delivery-only stores optimized to lower costs and boost profits.
And it's reasonable to assume sales at its existing 33,000 stores will keep improving. Same-store sales have gone up in all but three of its 49 years as a public company. Furthermore, this company has been profitable since its early days, and those healthy cash flows should only get better with increasing scale.
This plan isn't exactly rocket science, but it does make Starbucks a strong candidate to beat the market over the next decade. To be clear, I wouldn't be surprised if some other Robinhood stocks outperform Starbucks from here; some may have higher ceilings. But here's my point: I buy stocks I believe can beat the market average, and Starbucks stock has a simple market-beating thesis.
For perspective, consider another popular Robinhood stock: Riot Blockchain (RIOT -0.68%). The stock price of this cryptocurrency mining company is up more than 8,000% over the past year, absolutely crushing Starbucks stock and the market. But it's not as easy to make a bullish case for Riot Blockchain in the future.
It trades at a price-to-sales (P/S) ratio of over 500. That's extreme no matter how you look at it. The high P/S multiple implies robust future top-line growth. The company generates revenue by mining and selling Bitcoin. But mining gets more competitive as the price of Bitcoin increases, and cryptocurrency prices are highly volatile. The company would probably need to grow revenue 100-fold merely to justify its current valuation, let alone go up more from here. In short, it's questionable whether Riot Blockchain can beat the market long term.
By contrast, with Starbucks trading at 31 times forward earnings and with plenty of growth opportunities, it's easy to see how its stock can outperform from here.
Image source: Getty Images.
2. Its track record gives it credibility
It's one thing to say you're going to open 22,000 new stores; it's another thing to actually do it. But Starbucks management has a stellar track record. Consider that around the time the company went public in 1992, it had just 107 stores. If an obscure regional chain can open 32,900 locations in just 30 years, why can't a large-cap company open 22,000 over the next 10 years?
Sustained success over a long period strongly suggests Starbucks can still seize the opportunities in front of it. Many other promising Robinhood stocks don't check this box for me.
For example, consider newly public mobile-gaming platform Roblox (RBLX -22.06%). The company enjoyed 82% year-over-year revenue growth in 2020, an acceleration from 56% annual growth in 2019. If the company keeps this up, it's certainly a stock that could make you rich. But as with all newly public companies, it doesn't have the track record Starbucks has. How it will perform now that it's a public company remains to be seen.
I don't wish to take anything away from Roblox. I merely want to underscore how credible Starbucks' 10-year plan is. There's little reason to doubt its ability to achieve the goals it's set.
Image source: Getty Images.
3. Its downside is limited
When picking stocks, we aren't just looking at the potential upside, we also consider the downside risk. Even the best stock pickers are wrong sometimes.
There are other Robinhood stocks that check the first two boxes, like Zoom Video Communications and PayPal Holdings. I like both, but PayPal stock trades at a historically high valuation, and Zoom has never been cheap. In general, it's hard to find a quality stock trading at a reasonable valuation right now. But if the market falls or business execution falters, these stocks could have further to fall than Starbucks.
Therefore, with Starbucks stock, you can simultaneously play offense and defense. It has clear market-beating upside, a track record you can trust, and (I believe) limited downside because of its reasonable valuation. For these three reasons, Starbucks is my top Robinhood stock to buy today.
