Starbucks (SBUX 0.47%) is one of the most recognized brands in the world. Its steady growth has taken it to nearly 39,000 locations worldwide, and its store additions in China have helped fuel its continuous expansion.
These increases have made it a mature company with a powerful global brand, and its saturation in some markets makes more rapid growth more difficult to achieve. This should concern investors, who have more reasons to question whether the coffee stock can beat the market over time.
Starbucks' growth prospects
Despite Starbucks' longtime presence, its industry has tremendous room for growth. According to Grand View Research, the specialty coffee market is expected to grow at a compound annual rate of 11% through 2030.
Since Starbucks operates in numerous countries, it could be better positioned than any other company to capitalize on this trend. With that, CEO Laxman Narasimhan recently announced at a conference that Starbucks can grow to 55,000 locations by 2030.
However, one might also question the company's ability to capitalize on that increased interest, particularly in the U.S. In its home country, Starbucks must compete with numerous independents, chains such as Dunkin' and Dutch Bros, and likely from McDonald's beverage chain CosMc's, which has shown early signs of success.
Also, in its second-largest market, China, Starbucks faces off against Luckin Coffee and others. This places more pressure on Starbucks to keep its iconic brand vital and win the never-ending battle to buy from Starbucks rather than peers.
How it compares financially
With the continued expansion, Starbucks' revenue for the first quarter of fiscal 2024 (ended Dec. 31) rose 8% yearly to $9.4 billion. That was less than the 12% rise in fiscal 2023, though it included a 5% increase in comparable store sales in fiscal Q1.
Moreover, net earnings for fiscal Q1 rose 20% to just over $1 billion as the rise in operating expenses lagged revenue growth. Still, profits rose 26% in fiscal 2023, so profit growth rates may have trended downward.
Additionally, its peer, Dutch Bros, grew revenue by 31% in 2023 simply by following its regional-to-national expansion plan. Now that Dutch Bros earns an annual profit, that stock may appear more attractive to investors.
That's not to say that Starbucks doesn't shine in some areas. Dutch Bros grew its same-shop sales by only 3%, a lower rate than Starbucks. Additionally, Dutch Bros doesn't pay a dividend, while Starbucks shareholders earn $2.28 per share annually in payouts, a dividend yield of 2.5%. Since this payout has risen yearly since its introduction in 2010, current investors have good reason to stay with the stock.
Dutch Bros stock has outperformed Starbucks by a tiny margin, even when including dividends. However, Starbucks' more significant concern is competition against the S&P 500. Unfortunately, investors have to go back more than 10 years to find a period where its total returns outperformed the index. Even though the P/E ratio of 25 is near multi-year lows, that may not be enough to draw investors into Starbucks stock.
SBUX Total Return Level data by YCharts
Starbucks Stock: Buy, sell, or hold?
Under current conditions, investors should probably treat Starbucks stock as a hold. Its massive footprint and powerful global brand bring it stability, and the continued revenue and comparable-store sales growth show that it holds up well against intense competition.
Unfortunately, its stability may not address the rising competitive threat from peers like Dutch Bros and a new McDonald's beverage franchise. Nor does it compensate for its underperformance compared to the S&P 500.
Additionally, Dutch Bros' regional-to-national expansion likely makes it a more attractive stock to growth investors. While continued expansion and rising dividends should keep current investors in Starbucks stock, new investors are likely better off putting money to work in the S&P 500 or possibly Starbucks' rising competitor.
