With thousands of stores in different countries across the world, in addition to its continuous expansion and further business diversification, Starbucks is the largest coffeehouse and one of the most iconic American brands in the world. The company has done for coffee drinking what McDonald’s has done for burgers and fast food consumption, or what Apple has done for mobile phone usage. This article explores and discusses the pros and cons or advantages and disadvantages of investing in Starbucks stock.
Brewing Opportunity or Bitter Hitch: Weighing the Pros and Cons of Investing in Starbucks Stock
Pros: Advantages of Starbucks Stock
Starbucks might be known for its scenic coffeehouses and famous signature drinks but it has succeeded in expanding its revenue streams. The company sells coffee beans, tea bags, and merchandise through its stores and third-party retailers. It also operates a business division that generates revenues similar to commercial banks.
Of course, while more coffeehouses are either expanding or emerging, Starbucks keeps its market dominance through its established brand name, franchising business model, and economies of scale. It has also expanded its business through acquisitions and the creation of new brands. The following are the advantages of Starbucks stock:
• Large-Cap Stock Advantages: Starbucks is a large-cap stock with a market cap of over $100 billion. Investing in large-cap stocks has benefits over mid-cap stocks and small-cap stocks. These include stability, an established business model, strong management capabilities and corporate governance, transparency and availability of market information, and higher liquidity.
• Stock Repurchase and Dividends: It has pledged to engage in stock repurchases or share buybacks. Furthermore, for those looking for a passive source of income, note that its preferred stock has a strong track record of releasing dividends to its preferred stockholders while its common stock has also released dividends to its common stockholders during periods of strong financial performance.
• Established Global Brand: The company has a strong brand that is recognized in different parts of the world. It operates more than 15000 stores in more than 70 countries across the world. Investing in this company means investing in its reputable brand name and the growth opportunities that come with its current international presence and further expansion to developed and emerging markets.
• Multiple Revenue Streams: Another advantage of Starbucks stock is the diversified business of the company itself. It generates most of its revenues from its owned and franchised coffeehouses while also generating sales from coffee beans, teas, and merchandise. Its dedicated loyalty program is also an income-earning business division that operates similar commercial banks.
• Growth Through Expansion: Investing in this company also means banking on the possible opportunities that would come from its business expansion. The company has acquired other brands such as Seattle’s Best Coffee, Teavana, and Ethos Water. It also continues to expand its global presence while experimenting with new concept stores and new products and value-added services.
Cons: Disadvantages of Starbucks Stock
Starbucks has to wrestle with different competitive forces. It competes with other coffeehouses and fast food restaurants, as well as with companies providing alternatives to brewed coffees. This compels it to spend on business expansion and marketing. Competition affects its capabilities to maximize its earning potential and prospects.
It is also important to underscore the fact that coffeehouses and other fast food restaurants fall within the consumer cyclical or consumer discretionary sector. The earnings and profits of these companies are dependent on macroeconomic factors and the boom and bust phases of the economic cycle. Below are the disadvantages of Starbucks stock:
• Cyclical Nature of Its Stock: Starbucks is a cyclical stock. Hence, like other cyclical stocks, the earnings of the company are dependent on the overall economic condition. It tends to experience periods of economic downturns or recessions. Adding to this is the fact that it follows a premium pricing strategy which makes its product non-essential. Its entire business falls under the consumer discretionary sector.
• Impacts of Competitive Forces: The presence of other coffeehouses and companies offering substitutes to its products, in addition to its premium pricing, raises the bargaining power of its consumers while also compelling it to spend in marketing efforts to keep its brand afloat. Forces in its competitive environment can affect its earnings potential while also influencing its capital allocation practices.
• Significant Debt Levels: Starbucks has a debt burden that has increased significantly since its 2019 fiscal year. The coronavirus pandemic has forced the company to take on more debt to keep its operation and finance its ongoing projects and pursuits. Its long-term debt is still manageable and it still has a good credit rating but an economic downturn can affect its debt repayments.
• Global Supply Chain Disruption: Another disadvantage of Starbucks stock is that its price or value can be affected by widescale disruptions in the supply chain. These disruptions can stem from cross-border conflicts, regulations relating to imports and overall trade, weather disturbances, the long-term impact of climate change on agriculture, and the bargaining power of suppliers.
