Starbucks is up more than 33,000% since it came public in the 1990s that turned a $10,000
investment at its IPO into more than $3.3 million dollars today, but starbucks stock is currently
down more than 30% from its recent high so is this growth story busted here's everything you
need to know about investing in starbucks today my name is BrianFeroldi and my name is Brian Stoffel
thanks to stockcard.io for sponsoring today's video as of the time of this recording i own
starbucks brian Stoffel does not. brian starbucks is a 100 billion dollar company that trades under
the ticker sbux starbucks mission statement is to inspire and nurture the human spirit one person
one cup and one neighborhood at the time i like that they have a mission statement
this isn't really my favorite i agree with you brian it's not my favorite either but when it
comes to what starbucks does they sell coffee and coffee related products at cafes throughout the
world and increasingly mobile and to go ordering has become very important starbucks has split its
revenue by about 50 50. about half of its stores are company owned half are franchised out and also
about 50 of them are in the united states 50 of them are international it's also worth noting
that starbucks does earn money from its consumer packaged goods that are available in places like
convenience stores and gas stations now one thing to import about investing in starbucks today is it
has very low customer acquisition cost the brand name starbucks has become ubiquitous with selling
coffee and the company has millions of raving fans around the world when it comes to customer demand
we gave the company a medium rating now look there's no doubt that people need their coffee
and they need it every day but they might not be willing to pay up for starbucks it is a luxury
good and we did see in 2008 when the recession hit that revenue declined on the plus side coffee is a
consumable good if you buy starbucks once you're going to buy it again that means that the vast
majority of this company's revenue is recurring turning to moat we did not give the company any
credit at all for the network effect however it is worth noting that starbucks has lots of
great locations that are located conveniently so you could make an argument that that adds to the
company's competitive position when it comes to switching costs we gave starbucks a low rating now
obviously this is a habit-forming trip that you make to get your coffee but also the company's
rewards program is so generous that that could entice customers to stick with starbucks over
the long run there's also an argument made that starbucks has developed such immense buying power
that it has a low cost production model when compared to smaller rivals but by far the most
important moat that starbucks the company has is its brand name it is top of mind when people think
of caffeinated beverages and that is incredibly important now the last few years have been very
challenging operating environment for companies like starbucks however over the last couple years
starbucks has continued to open up new locations find new ways to deliver coffee to people and add
new customers we think that the company's moat is expanding or is at least stable now when we
turn to the company's financials it's a little bit odd we know that 2020 was vastly affected by the
pandemic and because starbucks has a different fiscal calendar the trailing 12 months only
include one extra quarter of growth that said it is consistently bringing in lots of cash
currently at 30 billion dollars in revenue now starbucks is gross margin is actually
pretty low at 28.6 percent that's actually a negative in my opinion as you can see however
net income has been consistently positive while it took a huge dip during the pandemic it has
recovered to pre-pandemic-like numbers of over 4 billion investors should implode that free cash
flow largely tracks net income too so this company produces gobs of cash flow each year and that free
cash flow is important because when you look at the balance sheet this isn't our favorite there's
a lot more debt than there is cash on hand but knowing that you're going to bring in 4 billion
in free cash flow every year makes that acceptable finally starbucks has been producing positive net
income for decades and its returns on capital are very strong now when we look at starbucks
management we have an interesting situation howard schultz essentially founded the company having
bought out the small chain decades ago and made starbucks what it is today he stepped away from
ceo duties for a second time a few years ago and handed the reins over to kevin johnson but within
the past month johnson has announced that he was retiring on an interim basis schultz has come
back as the company's ceo now when it comes to glassdoor rating starbucks has historically been
a very beloved employer and gets great reviews more recently the numbers have been heading in the
wrong direction and only 71 percent of employees recommend the company to a friend and when we look
at insider ownership it's less than one percent which isn't terribly surprising given how old
and how big this company is when it comes to potential we think that starbucks has a low level
of optionality yes they're coming out with new ways to bring coffee to people in more convenient
locations and their consumer package good focus is definitely interesting however the company
has tried and failed numerous time with its food offering so we think the company's going to be
selling coffee for the foreseeable future turning to operating leverage we see the company that is
already being optimized to produce tons of cash so there's not much room for this to grow moving
forward when it comes to the addressable market opportunity the global coffee market is estimated
to be about 110 billion dollars and starbucks has captured a huge chunk of that however i think that
starbucks can actually create demand by opening up new stores for example there's a starbucks near me
i would not be a starbucks customer if the company's location wasn't so close to me i think
that same attribute can be said for the company stores around the world so that it creates demand
by opening up new stores so i think the company's tam is actually understated and when we look at
revenue growth we can take solace in the fact that almost all of it comes from organic revenue how
is starbucks done delivering for wall street the answer there is pretty good as mentioned
previously this stock is up more than 33 000 since its ipo has been one of the best performing stocks
over the last 30 years however over the last five years it's run into some problems and while a 73
return isn't bad that is lagging the market now starbucks does have a history of beating
wall street's estimates having done so in three of the last four quarters and we found out just this
morning as we were filming that the company had decided to pause its buyback program to reinvest
in its stores and its people it is not paying down its debt but it does offer a dividend when
it comes to competition at scale there's companies like dunkin donuts and caribou coffee as well as
there's plenty of smaller rivals in individual towns however we don't think that they pose a
serious threat to starbucks's business the next risk to be aware of is geopolitical and that's
because starbucks is making a huge bet on china if anything happens with their operations there it
would be a huge hit to investors another risk to bear in mind is that there is an outside force to
be aware of and that is coffee prices when coffee prices rise so do starbucks's input costs and
when we look at valuation we think that this is a medium level the company trades for about 23 times
trailing earnings and free cash flow that's not super expensive but not a screaming deal either so
what should investors watch moving forward first and foremost keep an eye on comparable store sales
this is sales at each existing starbucks we want to see this number remain positive and continue
to grow for decades to come second keep an eye on margins by doing so you can track to make
sure that the cost for the input of coffee is not becoming too high and you can see if the company's
decision to transition to smaller store formats to facilitate drive-throughs might drive more
profitability third keep an eye on international growth international is the reason to buy this
company and it's going to be the thing that drives its long-term growth we want to see signs
that those international stores are winning over consumers and the company's top line continues to
grow so how did starbucks score on our investing checklist the answer there might surprise you
on mine it got a 74 which is in my investable category hence why i own shares myself on the
other hand in my framework it ended up in the fragile category because i'm not convinced that
the moat is super wide nor am i convinced that there's a lot of optionality left now that doesn't
mean that i don't like starbucks the franchise i actually think it's a great company but as an
investment it's not getting my dollars all right we made our calls it's a thumbs up for me and a
thumbs down for brian so i'm going to head on over to stockcard.org to hold ourselves accountable so
starbucks is going to go in brian stoble's fragile portfolio this is his thumb down portfolio so i'm
going to place a new order the ticker symbol is sbux we're going to do a buy decision today's date
is april 4th this is an 86 dollar stock so i'm gonna buy about 13 shares and this scored a 4.5 on
his investing checklist next i'm going to go to my thumbs up portfolio and i'm going to do the exact
same thing and while brian is doing that we want to remind folks that you can see these portfolios
at stockcard.io for free we also encourage you to enter the beat the brian's contest it is a contest
taking place throughout the whole year the first quarter just ended and hundreds of participants
who outperformed brian and i already are getting three months of vip access to stockcard.io enter
now pick five stocks that you think will do the best between now and 2022 and if you come in
first place you can win a thousand dollar prize there you have it starbucks gets the thumbs up
for me and the thumbs down from brian who's right we'll just have to wait to find out brian's out