Starbucks (SBUX): A Bear Case Theory

We came across a bearish thesis on Starbucks on Trade At Your Own Risk's Substack. As of 28ᵗʰ August, Starbucks's share was trading at $88.02. SBUX's trailing and forward P/E were 38.10 and 23.66 respectively according to Yahoo Finance.

The author of the article expresses their personal fondness for Starbucks, enjoying their beverages and food, particularly at their flagship stores like the Starbucks Reserve located in the Empire State Building. However, despite their personal affection for the company, they acknowledge that Starbucks' stock performance has been subpar over the past decade, with shares up only 15% in the last five years compared to the S&P500's 90% climb. In the past year, Starbucks' stock price has shown a negative return. The company carries a significant debt load of approximately $28B but generates enough free cash flow to service it. Despite this, the debt is considered manageable but requires careful financial management.

The article highlights several challenges faced by Starbucks, including store oversaturation, with some locations appearing dirty and uninviting. The trend is shifting towards pick-up services, but many customers still enjoy the experience of sitting down at Starbucks. One positive aspect for investors is the company's dividend payout, which is attractive but can be compared to the returns from Certificates of Deposit (CDs) that are currently offering 4-5% interest rates. A major concern for Starbucks is the rise of Dutch Bros, often referred to as 'the next Starbucks,' which has shown impressive growth, doubling in stock value over the past year and reporting a 28% year-over-year revenue growth in its most recent quarter.

The article concludes by discussing the potential long-term risks to Starbucks' brand due to its current strategy of maximizing profits from existing locations rather than innovating and reimagining the coffee house experience. This approach may boost short-term earnings but could weaken the brand's competitive position. The author suggests that winning back market share will be challenging and references a hedge fund manager's opinion that Starbucks' brand is now weak competitively. Given these challenges and the competitive landscape, the author personally prefers to invest in Dutch Bros over Starbucks, finding the latter's stock unattractive despite their personal love for the company.

Previously, we covered a bullish thesis on Starbucks, but the current thesis by Trade At Your Own Risk presents a contrarian view. The stock has depreciated by 14.74% since our coverage. The previous thesis highlighted initiatives like Starbucks Rewards and venture in China, while the current thesis emphasizes challenges such as store oversaturation, significant debt, and rising competition from Dutch Bros. The conviction in the thesis has weakened due to Starbucks' subpar stock performance and competitive landscape. Trade At Your Own Risk shares a bearish view, citing Starbucks' unattractive stock and weakened brand competitiveness, differing from the previous bullish thesis.

Starbucks is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 70 hedge fund portfolios held SBUX at the end of first quarter which was 84 in the previous quarter. While we acknowledge the risk and potential of SBUX as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.

Starbucks is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 70 hedge fund portfolios held SBUX at the end of first quarter which was 84 in the previous quarter. While we acknowledge the risk and potential of SBUX as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering