Shares of Starbucks (SBUX, Financial) have been pretty rangebound over the last few quarters. Despite the company’s extravagant expansion plans and the proven track record of the management, it appears that Starbucks has peaked, at least for now.
The company reported its quarterly results this week and failed to beat the revenue estimates. As a result, the stock was down over 3% in after-hours trading. The company reported first-quarter sales of $5.7 billion, up 6.7% but short of the analysts’ estimates by $120 million. On the earnings front, Starbucks reported EPS of 52 cents, which was in line with the expectations.
Despite the decent revenue growth and double-digit EPS growth, the market doesn’t look too pleased with Starbucks' results. Given that Starbucks is currently trading at 30 times trailing price-earnings (P/E) ratio, it is not surprising that investors aren’t too impressed with its growth.
Ideally, a company trading at 30 times trailing earnings should grow by at least 20% to justify its valuation. However, investors are paying a premium for Starbucks for its earnings power and massive potential in big Asian markets like China and India. However, despite its potential, Starbucks faces several headwinds and is unlikely to move past its 52-week highs in the near future.
Starbucks' earnings and revenue growth has slowed down drastically over the past few quarters, which is understandable given the size of the company. However, the company’s earnings multiple has remained over 30, and the market has failed to adjust its valuation accordingly.
Going forward, even if Starbucks grows at an above-average rate, it will still take time for the stock to grow into its current valuation. This is probably the reason why Starbucks has underperformed and remained rangebound for over a year. Despite its growth prospects in the Asian markets, buying Starbucks on the current pullback would not make sense for long-term investors.
Conclusion
Starbucks’ valuation is too high for it to be considered a good buy. The stock may have dipped a little after earnings, but its trailing P/E still stands at 30. Currently, the market is not pricing in Starbucks’ slowing growth. Paying a premium for the stock does not make sense right now as Starbucks' upside at current levels is pretty limited. Even if Starbucks reports above-average growth going forward, it will take the company a lot of time to grow into its current valuation.
Disclosure: No position.
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