Starbucks (SBUX 1.00%) has been one of the hottest stocks to buy lately with shares up 19% in the past three months, while the S&P 500 has only risen 8%. Investors have become more optimistic in light of slowing inflation, and the company's largest international market, China, is opening back up.
But it isn't all smooth sailing for Starbucks at this point as there are still economic challenges and labor issues that could derail its performance this year. Has the stock become too expensive at its current price, or is Starbucks still a good buy?
Starbucks' labor issues are far from over
According to Starbucks Workers United, there are 278 stores that have voted in favor of unionizing, and that's just a fraction of the near 16,000 locations the coffee company has in the U.S. And the battle is far from over -- in December, 60+ stores went on strike for multiple days in protest of the company and it closing stores that wanted to unionize.
For investors, these disruptions don't just affect sales -- as more stores unionize, that can lead to higher costs of labor for the company, hurting its margins in the process. At a time when inflation is already high and its products are looking even more expensive, that presents a serious risk for the company and its bottom line. In the long run, it could even derail the company's bullish forecasts.
The company's growth projections may be too optimistic
In Sept. 2022, at Starbucks' biennial Investor Day, management outlined an optimistic growth strategy. The company said it expected global revenue to grow within a range of 10% to 12% until fiscal 2025 (Starbucks' fiscal year ends in September). That's an incredibly bullish forecast given rising inflation and the potential for a slowing economy -- dangers that were already looming when those projections were made. And when looking at Starbucks' historical growth rate before the pandemic, that's also above average:
Data by YCharts.
As businesses get larger, their growth rates tend to slow down, and Starbucks may be a bit too optimistic in its assumptions that it will be able to buck that trend amid some challenging macroeconomic conditions. But without high expectations, it can be difficult for the stock's price to remain as high as it is.
Starbucks' valuation is incredibly rich
Starbucks is trading around its 52-week high, and the stock now commands a price-to-earnings multiple of 38. That's considerably higher than the S&P 500 average of 19, and it's also high compared to Starbucks' pre-pandemic average:
Data by YCharts.
Given the uncertainty ahead, and with so many factors that could potentially hurt its business (e.g. rising COVID cases, inflation, recession, labor issues), it's baffling as to why investors would be paying a higher premium for the stock than they have in the past as the coffee giant looks much riskier today.
Starbucks is a stock that could underperform this year
Thanks to a late rally in 2022, Starbucks stock finished the year down 15%, slightly outperforming the S&P 500's decline of 19%. But this year, with an elevated valuation and another potentially challenging year ahead, investors shouldn't count on Starbucks building off its recent gains. Instead, I would expect to see the stock fall, and the sell-off could be significant if there's a prolonged recession.
