Time To Pick Up the Pieces of Starbucks' Broken Growth Story

Key Points

• Starbucks struggled in Q3 but reaffirmed guidance and is optimistic it is regaining traction. 
• Analysts' responses are mixed but show solid support for the stock above the $72.50 price floor. 
• An FOMC rate cut will provide a tailwind for this stock later in the year, aiding growth in 2025. 

Starbucks' NASDAQ: SBUX struggles with growth are not over, but signs are emerging that it is on track to return to growth soon. While Q3 results were mixed, the company expects sequential improvements to accelerate, reaffirming guidance for the year. The takeaway for investors is that price action in SBUX shares is picking up, and a reversal should come soon. If the FOMC follows through with its rate cuts, the reversal will gain momentum and could take the stock price back to recent highs by the end of 2025. That would be a gain of 37.5% with limited downside risk. 

There is downside risk with Starbucks stocks, but price action and analysts' activity in 2024 suggest the floor near $72.50 is firm. The stock price shows substantial support at that level, which aligns with the analyst’s lowest price target. The analysts' response to the Q3 report is mixed but aligns with the trend: the range of fresh targets is narrowing to below the broader consensus but still above $72.50, with many targets offering single to low-double-digit upside.

The lowest new target is $78. Assuming no new low targets are set, Starbucks' price action may retreat to retest support, but it will likely trigger a buying frenzy well above the $72.50 level. Consensus offers a 20% upside but may not be reached until the analysts' revisions trend turns higher. That might not happen until after the Q4 report, early next year. 

Starbucks Struggles in Q3 as Volume Weighs on Revenue

Starbucks had a solid quarter, making sequential improvements, but the results are lackluster. The company reported $9.1 billion in net revenue, down 1.1% compared to last year and 160 basis points short of the consensus. 

The revenue weakness is due to a 3% decline in global comps driven by a 5% decline in transactions. Increased pricing and sales only offset the volume decline by 2%, and weakness was seen in all markets. North American comps fell by 2% on a 6% traffic decline offset by a 3% increase in pricing. International performance was worse, as China led the decline, with its 7% comp-store contraction driven by a 3% decline in transactions compounded by a 4% decline in check average. 

The margin news is mixed. The company reports that efficiency efforts are taking hold but are offset by investments, increased promotional spending, and deleveraging. The net result is a 60 basis point contraction in the GAAP operating margin; the operating margin came in at 16.7%, leaving the earnings at $0.93. The $0.93, as expected, offsets the top-line shortfall and is evidence that Starbucks’ turnaround efforts are working. Guidance is another bright spot, reaffirmed at the previous level. 

It was the conference call that invigorated bullish behavior. CEO Laxman Narasimhan was optimistic with his appraisal of business conditions and highlighted numerous strengths. Among them were strength in Japan and Latin American markets and “green shoots” in the US. Those included positive loyalty rewards traffic and other indications that the leaning into digital and mobile will pay off over time. Until then, Starbucks has been accelerating the rollout of new stores and widening its reach into smaller communities. The risk is that saturated markets can only drink so much coffee. 

Starbucks Stock In Rebound Mode But May Not Move Higher Yet

Starbucks stock is in rebound mode, showing significant support at a critical level. However, the stock price remains below significant resistance points that can cap gains and induce volatility over the next few months. The nearest is $82.50, which is already influencing the price action. If the market for SBUX can not get above that level soon, there is a substantial risk it will return to lower levels and close the gap opened following the earnings news. The consumer discretionary stock could move to $76.50 or lower in that scenario.