Starbucks (SBUX, Financial) has turned out to be a great long-term investment for people who bought the stock almost a decade ago. However, the company’s growth has probably peaked for the short term, and the stock will likely remain range bound for the foreseeable future.
I told investors to stay away from Starbucks back in February as I believed the stock had hit the growth ceiling. Since then, Starbucks has struggled to move higher and has been trading under $55 most of the time. Despite the 10% pullback, Starbucks is still overvalued, and investors should probably wait for a significant drop before buying the stock.
Starbucks is currently trading at 32 times trailing earnings, and investors have already priced in a lot of future growth into Starbucks' current value. Starbucks is still a great company, but the stock is not attractive right now. The company’s best days may be behind it, at least for a few more quarters.
Although Starbucks still has a lot of room to expand internationally, its growth will probably be slower this year. Given its valuation, Starbucks should be posting at least 15% to 20% sales growth this year. However, the growth estimates are lower than that, which is why the stock is likely to pull back.
Given its growth estimates, Starbucks should be trading at around 25x trailing earnings multiple, which represents a further 20% decline from its current levels. I would suggest buying the stock when it falls to the sub-$50 range.
With revenues expected to rise only 10% this quarter, Starbucks’ current valuation will not last long. When it comes to growth stocks like Starbucks, investors should wait for about a 20% decline from its all-time highs before buying it. With the company’s comps slowly saturating, it is highly likely the stock will pull back further.
Conclusion
Starbucks has managed to use innovation and brand experience to continue growing over the last few years. However, the company’s growth is slowing down, and it will need to expand internationally to sustain its growth rate. However, the current growth estimates do not justify Starbucks' valuation, and I expect the stock to head lower in the coming few quarters.
Starbucks is still a great company, and investors should eagerly wait for the stock to fall under $50 before initiating a long position.
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