The "Magnificent Seven" stocks -- Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia, and Tesla -- all crushed the performance of the S&P 500 in 2023. But as we have seen time and time again for several years now, themes that play out in one year don't necessarily continue to dominate the following year.
Market leaders and market laggards can trade places in an instant. Over the long term, the best companies usually win. And that's why the Magnificent Seven stocks could still be worth owning, or even buying now. Still, the valuations of these beloved stocks are far higher than they were a year ago, making it harder to sustain the blistering outperformance.
One of my favorite Warren Buffett quotes is that "you pay a very high price in the stock market for a cheery consensus." Put another way, red-hot stocks adored on Wall Street are usually expensive. Meanwhile, a company undergoing challenges that is out of favor is usually cheap, even if the long-term investment thesis is solid.
Here's how former market darling Starbucks (SBUX +0.30%) could regain its mojo, and why the dividend stock is worth buying in January.
Image source: Getty Images.
Expectations are low
Starbucks crushed Q4 fiscal 2023 expectations with a blowout quarter. The stock initially popped on the news. But since then, Starbucks is down near a 52-week low, and has given up nearly all of its initial gains from the strong results during a time when the S&P 500 has rallied just under 12% since Nov. 1.
In fiscal 2023, Starbucks booked near-record earnings per share (EPS) of $3.58, a less than 5% year-over-year increase. The low bar sets the stage for Starbucks to not just exceed expectations in 2024, but also become a better all-around value.
The stock currently trades at a price to earnings ratio of 26.3, which isn't cheap, but it's also not terribly expensive relative to the market. But Starbucks could begin to look cheap if it keeps growing and the stock continues to languish.
To further sweeten the pot, Starbucks has raised its dividend every year since it began paying one in 2010. The company will probably continue to make meaningful dividend raises for years to come. A growing dividend paired with growing earnings provides the momentum needed to justify a higher valuation for Starbucks.
It sounds great, but the real question is whether Starbucks has what it takes to meaningfully grow earnings, or if a low-single-digit growth rate should be seen as the new normal.
NASDAQ: SBUX
Key Data Points
Starbucks' upbeat guidance
During its Q4 fiscal 2023 earnings call, Starbucks provided crucial fiscal 2024 guidance, including 5% to 7% comparable stores (or comps) growth, as existing stores are expected to boost sales thanks to digital engagement and customer loyalty as Starbucks' master plan takes form.
On top of same-store sales growth, Starbucks expects to grow new stores by 7%, with 75% of those new stores coming from outside the U.S. By the end of fiscal 2024 (late September or early October 2024), Starbucks expects to have nearly 41,000 stores globally. All told, Starbucks expects 10% to 12% sales growth in fiscal 2024, but likely on the low end of that range.
In fiscal 2023, the U.S. business led comp growth. North American sales still make up nearly three-quarters of the overall business. But Starbucks continues to bet big on China, with China new store growth expected to increase 13% in fiscal 2024.
China stands out as the greatest long-term catalyst for Starbucks' growth. 90-day active Starbucks rewards members are around 33 million in the U.S., but 21 million in China. As a percentage of sales, Starbucks Rewards is far more popular in China than in the U.S., which shows a willingness to engage with the Starbucks app and use mobile order and pay.
China should continue to make up a larger share of the overall business given Starbucks' strong brand presence in China, the growth of the Chinese economy, and more favorable digital interaction.
It's too early to tell the effect Starbucks' investments will have on fiscal 2024 specifically. But overall the company has what it takes to grow over time.
Optimistic earnings expectations
Saving the best for last, Starbucks is forecasting 15% to 20% fiscal 2024 GAAP and non-GAAP EPS growth thanks to sales revenue growth and margin expansion. On the low end of that range, that would mean fiscal 2024 EPS of $4.12 -- far higher than the Street's estimate of $3.74.
Based on Starbucks' share price of around $94, that would be good for a forward P/E ratio of 22.8. And given that Starbucks expects revenue growth and margin expansion to continue in the years to come, the stock could continue to look like an even better value if the stock price languishes.
Starbucks stock is ready to rebound
Starbucks was hit hard by the COVID-19 pandemic, which threw a wrench in its growth trajectory. But fiscal 2023 proved the company is back on track and ready to post a record year of sales and earnings in fiscal 2024. Starbucks is a powerhouse brand that has transformed into a moderate growth business and a quality dividend stock.
Starbucks stock sports a yield of 2.5%, which isn't super high. But when you look at the overall investment thesis, Starbucks strikes a unique balance of growth, income, and potential value given the fiscal 2024 earnings guidance.
Starbucks stock fell 6.6% in 2023 compared to a great year in the broader market. I don't expect that underperformance to continue this year. For investors who believe Starbucks can execute on this year's guidance, the stock is worth buying in January.
