Stock Madness Final 4: Starbucks

Starbucks vs. Apple

In the first round of Stock Madness 2008, I boldly predicted that Team Starbucks (Nasdaq: SBUX) would grind up all the teams in its path on the way to Stock Madness glory. So far, so ground, with Dolby Labs (NYSE: DLB) getting blown out by Starbucks in the opener.

Like Starbucks' coffee, the temptation to look ahead to a championship-game face-off with Google (Nasdaq: GOOG) -- likely railroading Canadian National in the other Final Four game -- is strong. But I'm keeping Team Starbucks focused on the task at hand: Chewing up and spitting out our next opponent, Apple (Nasdaq: AAPL). Let's bite right in, shall we?

Starbucks: Talkin' valuation
Long a favorite of growth investors, Starbucks shares have shed about 40% over the past year. Meanwhile, Apple shares are up a whopping 60%. Let's take a mile-high view of the valuation:

Starbucks trades more cheaply than Apple on a relative basis, against forward estimates and historical norms. Eager Apple advocates (and I know you're out there) would probably counter that Apple throws off more cash than Starbucks -- a fair point. However, they would probably neglect to mention that, unlike Starbucks, Apple's long-run growth and current valuation are predicated on continuous innovation.

Starbucks: Talkin' innovation
So what's the big deal about that? Apple needs to innovate not only to grow, but to stay in place while competitors such as Microsoft (Nasdaq: MSFT) and Dell (Nasdaq: DELL) race -- OK, maybe stagger -- to follow Apple's often innovative lead. The pace of technological change in Apple's core areas is breakneck: Today's iPod touch is 2010's paperweight.

Now, compare that rate of change to the coffee industry, where technology moves at the speed of a Juan Valdez mule. Unlike Apple, Starbucks could turn off its R&D spigot tomorrow and still be well-positioned in its industry five years from now. In contrast, it isn't even clear how Apple will define itself in only a couple of years.

But lest you think Starbucks Chairman Howard Schultz is resting on his laurels, know that the java giant has proven itself a cost-effective innovator when it sets its mind to it. Witness its history of expanding existing beverage lines, and the blog-buzzing success of its MyStarbucksIdea social-networking site, where visitors are invited to "help shape the future of Starbucks -- with [their] ideas."

And when Starbucks isn't leading the innovation pack, it can gobble up those who do. When Schultz tasted the wondrous coffee that spills forth from Clover, he didn't buy just some of the machines for Starbucks: He bought the company. Ah, to be a Rule Maker.

Starbucks: Talkin' summation
If I haven't sold you yet or in my opening round piece, let me crystallize it all for you:

• With Starbucks, investors have a chance to own a world-renowned brand that has plenty of growth ahead of it at a discounted price.
• Unlike Apple, Starbucks isn't forced to constantly innovate to maintain its competitive position.
• The return of Howard Schultz to the Starbucks corner office has meaningfully refocused the company.
• Baristas at McDonald's (NYSE: MCD)? Do you want laughs with that?

Vote Starbucks
If you'd like to see Starbucks advance to the Stock Madness 2008 Championship Game, head on over to Motley Fool CAPS now and cast your vote for Starbucks. See you in the finals, Google.

Who's going to take home the trophy? View the rest of the bracket.