Based on the stock's performance of late, investors seem to have lukewarm opinions about Starbucks (SBUX -0.17%) right now. The coffee giant is underperforming the market in 2023 despite generally positive growth and earnings trends. That performance gap is even more puzzling considering the overall strength of the fast-food industry right now, not to mention Starbucks' unique global expansion opportunities.
Given its potential for excellent returns, now might be a good time to take a closer look at Starbucks stock. Here are three of the many reasons why the stock has real potential for long-term investors in mid-2023.
1. Starbucks is reporting solid growth
The chain's last earnings report was packed with good news about the business. Starbucks managed to expand comparable-store sales by a strong 11% through April 2 (the end of fiscal 2023's Q2). The chain posted a healthy balance between rising customer traffic and increased spending, too. These metrics were up 4% year over year in Q2.
Executives credited a return to the basics, with management focused on raising the bar around beverage and food quality, the in-store and on-the-go dining experiences, and customer service in general. "We are brewing on all cylinders across our building blocks of growth," CFO Rachel Ruggeri told investors in early May.
2. Starbucks has a great plan for growth
Starbucks has a good shot at building on this positive momentum. The China market was a drag on global growth, for example, in 2020 through 2022 but economic conditions there aren't likely to remain depressed forever. Meanwhile, the U.S. segment could see a solid lift in both sales and earnings as the chain pushes deeper into the drive-thru and delivery channels. Innovative product releases like the recent Pistachio Cream Cold Brew, plus popular breakfast sandwiches, are also lifting profits today.
SBUX Operating Margin (TTM) data by YCharts
Contributions from these areas helped push operating profit margin up to 14.1% of sales last quarter from 12.4% two years ago. Starbucks is predicting faster earnings growth in the second half of the fiscal year as well following surprisingly strong profits in Q2. It's easy to see how improvements in the chain's earnings power will translate into higher shareholder returns.
3. The price is right for Starbucks stock
Starbucks shares are attractively priced today at around 3.5 times annual sales, down from the pandemic highs of closer to 5 times revenue. For context, investors are paying over 9 times revenue for McDonald's much more profitable business. The slower-growing Dutch Bros, meanwhile, is valued at roughly 2 times its revenue.
If you're risk-averse, you might want to wait until the company's fiscal Q3 update in early August for confirmation that Starbucks is still on the right path in its recovery plan. But growth stock investors can consider buying the growth stock now while Wall Street is feeling less enthusiastic about short-term operating trends.
It's possible that Starbucks' operating trends will be volatile in the next few quarters, but the long-term outlook is bright for this business as it capitalizes on increasing customer satisfaction across its selling footprint. For that reason, and for the chain's increasing margins, consider adding Starbucks to your watchlist, if not your portfolio, today.
