Is Starbucks Stock Overvalued or Undervalued?

A Starbucks logo hangs outside of the Starbucks-owned American stores in the Brooklyn borough of New York on May 29, 2018. (Lucas Jackson/Reuters)

Starbucks Corporation shares have lagged the S&P 500 in 2021, generating a year-to-date total return of 8.9 percent.

At this point, investors may be wondering whether Starbucks shares are undervalued after their recent performance.

Earnings

A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is at about 29.4, nearly double its long-term average of 15.9.

Starbucks’ PE is 37.7, well above the S&P 500 average as a whole. Starbucks’ PE ratio is also up 11.8 percent over the past five years, suggesting the stock is priced at the high end of its historical valuation range.

Growth

Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 21.6. Starbucks’s forward earnings multiple of 33.4 is still more than 50 percent higher than the S&P 500’s, making Starbucks look overvalued.

Yet when it comes to evaluating a stock, earnings aren’t everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 0.9; Starbucks’s PEG is 1.12, suggesting Starbucks is slightly overvalued after accounting for its growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.19, well above its long-term average of 1.63. Starbucks’s PS ratio is 4.48, more than 40 percent higher than the S&P 500 average as a whole.

Finally, Wall Street analysts see some value in Starbucks stock over the next 12 months. The average analyst price target among the 29 analysts covering Starbucks is $125, suggesting 9.6 percent upside from current levels.

The Verdict

At its current price, Starbucks stock appears to be slightly overvalued based on a sampling of common fundamental valuation metrics.

By Wayne Duggan

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