Shares of Starbucks (SBUX -1.02%) and Carnival (CCL 1.13%) have both struggled across 2022's trading. Against a backdrop of bearish pressures impacting the overall market and business-specific challenges, the coffee giant's stock is down roughly 26% year to date, and the cruise operator's around 51%.
Which of these beaten-down stocks is more likely to see a sustained rebound and deliver big wins for shareholders? Here are differing takes on the question from two Motley Fool contributors.
Carnival looks less risky in one key respect
Keith Noonan (Carnival): All in all, I think that Starbucks is a much better company than Carnival. The coffee giant's business looks much healthier, it's got a much better balance sheet, and its path to earnings growth looks less speculative. However, there are scenarios in which Carnival could prove to be the better stock.
With market saturation having already been pretty much reached in the U.S., Starbucks has centered much of its growth strategy around expansion in China. Coffee consumption in that country is projected to soar through the next decade and beyond, but political risk factors could crush the Seattle-based company's growth initiatives and valuation.
Tensions between the U.S. and China have been running hot lately, and there's a risk that relations could worsen due to the contested issue of Taiwan's independence. As we saw with companies ceasing operations in Russia following the invasion of Ukraine, geopolitical developments can create major operating headwinds. Starbucks expects to have 6,000 stores in China by the end of this year, and there's a possibility that an invasion of Taiwan or other developments could force the company to close those stores. Even if nothing drastic happens with Taiwan, there's still a risk that Chinese citizens will lose affinity for American brands and gravitate toward domestic alternatives if relations between the countries worsen.
Carnival isn't completely immune to geopolitical risk factors, and it already had to change some cruise routes in response to the Russia-Ukraine situation, but its stock could bounce significantly above current pricing levels, and it looks less risky on the China front. With pandemic-related challenges easing, the company's business should continue to recover in the near term, and it's probably the better play for investors looking to avoid exposure to the Chinese market.
Starbucks has some solid advantages
Parkev Tatevosian (Starbucks): Starbucks is an iconic coffee enterprise poised to benefit over the next few years as the world progresses in its battle against COVID-19. The company's sales fell by 11% to $23.5 billion in 2020 but surged higher to $29 billion in 2021. Consumers demanded more digital ordering options at the pandemic's onset, and management quickly adapted the business to accommodate rapidly evolving customer behavior.
Additionally, remote work has been a longer-lasting outcome of the pandemic, so more customers are ordering Starbucks in the suburbs outside urban locations; fortunately, areas outside of downtown are less costly for Starbucks to run. Digital orders can also lower expenses because they don't require a cashier to process. Starbucks had an excellent business that grew revenue from $16.4 billion in 2014 to $29 billion in 2021 and earnings per share from $1.35 to $3.54 over that time. Starbucks could become an even more robust organization in the aftermath of the pandemic.
SBUX PS Ratio data by YCharts.
The stock is trading at a price-to-sales ratio of 3.2, which is not expensive compared to its average for the metric over the last decade. The price-to-sales ratio can be the best valuation to use when a company's profits and cash flow have recently experienced unusual trends, as Starbucks' did due to COVID.
That said, Starbucks faces headwinds in the near term, including ongoing shutdowns in China, where it has the second-highest number of locations. Moreover, the pandemic has unleashed an ugly bout of inflation, raising operational expenses and pressuring Starbucks' profits.
Which of these stocks is the better buy?
For most investors, Starbucks is probably the better choice. If you're particularly concerned that tensions between the U.S. and China will escalate and upend the coffee company's growth strategy, Carnival stock would be a better fit.
Otherwise, the fact that Starbucks is currently posting significant profits and has a much better balance sheet and overall stronger business than Carnival suggests that it's the better buy.
