Dueling Fools: Starbucks Bear

Starbucks (NASDAQ:SBUX) has clearly been one of the greatest recent American success stories. The company singlehandedly turned coffee from a $0.60-a-cup afterthought to a $3.50 stand-alone event. I certainly never thought they'd have even a fraction of the stellar success they've achieved in such a short time. If I had been on the bear side of this argument 10 years ago, I would definitely be eating crow today.

The past, however, is behind us; to investors, Starbucks' future matters more. While its history of growth has been absolutely phenomenal, that growth is simply not sustainable forever. Consider the amazing density of retail establishments that sell its coffee around some of America's landmark buildings:

There are about 10 Starbucks outlets per square mile around the Empire State Building. Where's the room for continued growth? Even in my neighborhood in suburban Cincinnati, there are two outlets across the street from one another. Starbucks, it seems, is nearly everywhere.

So what?
There are two ways for retailers to grow: by opening more stores, or by selling more stuff in existing ones. Starbucks certainly can't count on current stores producing its 20%-25% sales growth target on their own. Take a look at its recent same-store sales data to see why:

Same-store sales growth is hovering around 5%. That means a huge majority of Starbucks' growth depends on opening additional successful outlets. With more than 12,000 existing Starbucks locations, many communities with a population dense and affluent enough to support a Starbucks probably already have at least one, which means that new outlets run the risk of at least partially cannibalizing sales at existing units, keeping same-store sales down.

Starbucks simply cannot sustain its rapid expansion forever. In its zeal to open more stores, it risks oversaturating its markets with new outlets. If that happens, it will hurt the profitability of existing stores, and thus, the entire chain. Yet with same-store sales stagnating, the only option Starbucks really has for growth is to open more stores. At some point, something has to give.

The harder they fall
Unfortunately for investors, that something might very well be Starbucks' stock. Even assuming the company does somehow manage to continue firing on all cylinders, and grow without cannibalization, its stock isn't exactly cheap. In fact, here are several companies in the market that are expected to grow faster than Starbucks over the next few years, but whose shares are available more cheaply:

There is no question that Starbucks has been one of the greatest American corporate success stories of this generation. For that success, its founders and early investors certainly deserve their rewards. Treating the past as prologue, however, is a dangerous way to invest. Future investors are unlikely to see the sustained, tremendous growth they've come to expect. With continued rapid growth priced into its shares, any stumble will likely be painful to shareholders.

Great company, difficult investment
Starbucks is, and will very likely remain, an excellent company. There's a world of difference, though, between an excellent company and an excellent investment. If being a member of the Motley Fool Inside Value team has taught me anything, it's that investing success comes largely from paying the right price for the right companies. At Starbucks' current market price, there's simply too much perfection priced into its shares. It's certainly worth watching, but unless it either grows into its current market cap, or stumbles its way to value territory, my money and I are staying away.

Think you're done with the Duel? You're not! Go back and read the other three arguments, then vote for a winner and share your opinion at Motley Fool CAPS .

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At the time of publication, Fool contributor Chuck Saletta had no ownership stake in any of the companies mentioned in this article. The Fool has a disclosure policy.