Starbucks (SBUX -1.16%) has one of the most iconic consumer brands in the world. Its premium-priced coffee has enabled the business to experience strong profit growth over the years. However, it has experienced a slowdown in its growth recently amid worsening global economic conditions. Last year, it brought on CEO Brian Niccol from Chipotle Mexican Grill, in an effort to turn things around.
Even though those efforts are in their early stages, the stock has been doing well since then. It rallied more than 20% in the past six months, hitting a new 52-week high of $117.46 last week. Could this be the start of even larger gains to come for Starbucks stock, or should investors be concerned that it may be approaching a peak?
Starbucks still has a lot of work to do in turning its business around
Starbucks brought on Niccol in the hopes that he could get Starbucks' business back on the right path. Slowing sales numbers have been a concern for investors, and that remains an issue today.
When the company reported earnings in January, its same-store sales were negative for a fourth straight quarter. Same-store sales growth tells investors how much growth the company has achieved when excluding the effect of new store openings and closures. It considers only those stores that were open a year ago.
However, even when considering its overall growth rate, those numbers also haven't been impressive.
SBUX Operating Revenue (Quarterly YoY Growth) data by YCharts.
Niccol is making some changes that should help the bottom line, such as cutting 30% of the menu and reducing staff, but tariffs could negate some of those cost savings and efficiencies. Under the threat of trade wars and global economic uncertainty, it may not be easy for Starbucks to jump-start its growth rate anytime soon. The problem is, many investors may already be pricing in the stock as if its turnaround is complete.
How expensive is Starbucks stock?
The coffee stock's strong rally in recent months means that investors now have to pay 37 times its trailing earnings to own a piece of the company. For a business that's struggling to generate growth and that faces some tough competition in China from low-cost rivals, that looks like an expensive ask for investors, especially given the more modest earnings multiple Starbucks has averaged in recent years.
SBUX PE Ratio data by YCharts.
Investors are normally willing to pay a premium for a stock that's growing at a fast rate. But in Starbucks' case, that isn't happening, and things may not get better anytime soon.
There's a bit too much optimism priced into Starbucks stock right now
Starbucks looks incredibly expensive given the challenges that lie ahead for the business. Even if the risk and uncertainty related to tariffs prove to be short-lived, Starbucks still hasn't shown that it can find a way to get back to growing its revenue at a rate high enough to justify a high valuation.
Investors may be a bit too optimistic about the company. The danger is that this means there's little to no margin of safety if you buy the stock today, as it could hit a peak soon. Starbucks is a stock I'd put on a watchlist for the time being. The business still faces some considerable challenges, and it could be a risky buy at its current levels.
