Down 35% in 2022, is Starbucks stock a buy now?

Amid the market rout in recent months that has crushed high-growth, fast-growing tech stocks, a blue boat tick like Starbucks (NASDAQ:SBUX) ended up in chaos. Shares are down 35% this year alone, prompting many shareholders to consider showing up for exits.

However, I think the pessimism offers savvy investors a buying opportunity in this household name. Here are three reasons why Starbucks is making a solid investment right now.

A strong brand as a competitive advantage

For starters, Starbucks has a powerful competitive advantage which is intangible in nature, making it extremely difficult (if not impossible) for a rival to replicate. I’m talking about the company’s globally recognized brand. According Piper Sandlerfrom spring 2022 Checking in with teens survey, Starbucks was in the top three in the restaurant category among Gen Z. It’s a lucrative place because these young consumers have the potential to be lifetime Starbucks customers.

Starbucks’ gross margin of 27.9% over the 12-month period indicates consumers’ willingness to pay for what they consider premium food and beverage. Such a high margin gives the company leeway when it comes to absorbing higher input costs while maintaining profitability.

Throughout the inflationary environment the United States has endured, Starbucks has always been able to raise prices without adversely affecting demand. “Over the past year, we have raised prices several times to deal with growing inflationary pressures,” said Founder and Interim CEO Howard Schultz. call for second quarter 2022 results. “Yet we experienced negligible customer attrition, once again demonstrating the elasticity of demand for Starbucks coffee.”

Legendary investor Warren Buffett thinks the most telling sign of a quality business is the presence of pricing power. Starbucks ticks the box in this category.

Runway to open more stores

Despite Starbucks’ ubiquity today, with 34,630 stores worldwide, management believes there are many opportunities to continue to grow the retail footprint. By 2030, executives predict there will be 55,000 Starbucks locations in 100 different markets. This is still a long avenue of expansion.

The United States, which accounts for 67% of global revenue, is experiencing record levels of demand, forcing Schultz to suspend share buybacks to direct capital investment towards accelerating store openings, with a focus on building drive-thru. Although there are currently 15,544 stores in the United States, experimenting with new methods of serving customers in the most convenient way for them will strengthen Starbucks’ already dominant position.

Image source: Getty Images.

China, unsurprisingly, will be the biggest engine of growth for the rest of the decade. Starbucks will eclipse 6,000 stores nationwide by the end of this fiscal year. Populating large urban areas with smaller, digitally-enabled outlets will help drive sales growth. Rachel Ruggeri, the company’s chief financial officer, said executives “remain very optimistic about our future growth in China.”

A larger store footprint will allow the business to leverage spend as revenue grows, supporting higher levels of profitability over time. Coffee is a lucrative business because it is universally loved and lends itself to repeat purchase behavior, which puts Starbucks in an advantageous position.

The valuation is attractive

With the stock falling in 2022, stocks are trading at an unstoppable pace price/earnings ratio (P/E) of just over 20. Not only is that near the lowest level Starbucks has sold in the past decade, but the stock is also slightly lower than the S&P500The P/E ratio of 21. Given the strong brand and growth opportunities, a valid argument can be made that Starbucks is a better company than the average company, justifying a higher valuation than the S&P 500.

Wall Street consensus analysts expect earnings per share to grow 12.2% annually from fiscal 2021 to fiscal 2026. Add to that a much higher multiple, and the potential for above-market returns is definitely there.

The beauty of owning Starbucks stock is that it is a type of forever investment. Serving consumers with premium-priced coffee and food doesn’t really invite much technological disruption, and the slow-moving nature of the industry benefits the business and its sustainability over time.

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Neil Patel holds positions at Starbucks. The Motley Fool holds positions and recommends Starbucks. The Motley Fool recommends the following options: $85 short calls in July 2022 on Starbucks. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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