Neha Marwah

Starbucks Stock Is Too Pricey For Its Performance: Time to Exit Starbucks recently reported its third quarter FY2025 earnings, and while there are a few early signs that the turnaround might be gaining some ground, the overall picture is still not very encouraging. The company is putting in a lot of effort to get back on track, but the stock price seems to be running way ahead of the actual business performance. With same-store sales still declining and margins under pressure, it’s difficult to justify the current valuation. In addition, the uncertainty around the turnaround makes it tough to stay optimistic. Considering this, I’d recommend selling the stock. In this analysis, I’ll take a brief look at Starbucks’ latest quarterly performance, highlight what’s weighing on the company, and examine its valuation – all to support my recommendation to sell the stock. Quarter at a Glance Starbucks recently reported results for the third quarter ending June 2025 with revenue growing 4% to $9.5 billion. Sales growth was primarily driven by 308 net new stores that the company opened during the quarter. On the other hand, same store sale continued to disappoint. For the sixth straight quarter global comparable store sales declined 2% as number of comparable transactions dipped 2%. This was partially offset by a 1% increase in the average ticket size. Continued decline in same-store sales is a red flag signalling weakening demand at existing locations. Starbucks’ falling global same-store sales is largely driven by a slump in U.S. comparable sales, which account for about 70% of its revenue. The company is also facing headwinds in China, its biggest international market. However, there’s a silver lining – comparable store sales grew 2% in the latest quarter, marking a turnaround after several quarters of declines and flat growth in Q2 FY2025. On the profitability front, operating margin contracted 680 basis points year-over-year to 9.9%. Net income saw a sharp 47% drop, falling from $1,054.8 million in the prior year to $558.3 million. The decline was driven by the company’s ongoing turnaround efforts, investments in the “Back to Starbucks” initiative, additional labor costs, spending on Leadership Experience 2025, and inflationary pressures – all of which weighed on the bottom line. Overall, the quarter was depressing, weighed down by persistent softness in same-store sales and pressure on profitability. Certain things are not working in favour of Starbucks. Are customers not as excited to hang out and grab a cup of coffee from this once most iconic coffeehouse? What has changed over time? Where has the coffee charm gone? The Reputational Damage One area where Starbucks is clearly struggling is with its brand perception. Once seen as a symbol of aspirational lifestyle and an iconic coffeehouse, the company’s image has taken a visible hit in recent years. According to Stephen Hahn, executive vice president at reputation analytics firm Reptrak, Starbucks’ reputation score plunged from 71.5 in 2021 to a vulnerable 57.7 as of January 2025. That’s a 19% decline on Reptrak’s 100-point index, reflecting fading public trust and consumer enthusiasm. There are multiple underlying reasons damaging the company’s perception. The labor dispute has been one of the key factors weighing on Starbucks’ public image. It began in February 2022 with the coffee giant firing seven baristas for violating company policies in an effort to unionize. The issue further intensified with more than 400 Starbucks outlets voting in favour of joining the unionization drive. During the period the National Labor Relations Board (NLRB) received numerous complaints against Starbucks accusing of unfair labor practices and unlawful conduct. Although the company denied all allegations and ultimately secured a favorable ruling from the Supreme Court, the prolonged legal battle and intense scrutiny left an indelible mark on its reputation. The perception of Starbucks being a desirable workplace has taken a hit. Starbucks also faced significant consumer backlash as it got embroiled in a controversy sparked by a hoax letter suggesting that it was funding Israel in the Israel-Gaza war. This misinformation quickly gained traction and fuelled the boycott movement among Middle East and South Asian nations. The coffeehouse chain strongly denied the claims expressing it does not back any government or military action and is against all forms of violence. But the damage was already done. Growing Competition Starbucks customers have always enjoyed its traditional coffeehouse environment. However, in recent times, there’s been a noticeable shift away from Starbucks, as customers may be increasingly expecting more in terms of both experience and product offerings. In addition, rising popularity of other coffeehouse chains and quick service restaurants have also impacted Starbucks growth journey. Costa Coffee, the UK-based coffeehouse chain has been Starbucks global competitor, which enjoys remarkable popularity in the UK and Europe. While Costa Coffee is similar in certain ways, it also differs in several areas specially with the warmer atmosphere that if offers with a touch of British culture. While Costa positions itself as a premium coffee brewer with great focus on quality, it maintains a pricing strategy which is affordable and pleasing to a larger consumer base. Competition in Starbucks’ largest international market, China, has also intensified over the years. The country’s surging middle class, growing urbanization and a strong attraction for Western brands has worked in favor of the coffeehouse chain. But in recent years, homegrown rival Luckin Coffee has emerged as a formidable competitor. Founded in 2017, Luckin has aggressively expanded its footprint, now operating around 22,000 stores across the mainland, far outpacing Starbucks' 7,828 locations. Luckin has been strategic in targeting price-sensitive consumers, offering competitively priced drinks along with frequent promotions and discounts. The brand also invests heavily in innovating and adding new flavors to keep its audience engaged. While Starbucks continues to position itself as a premium coffeehouse experience, Luckin’s strategy has helped it carve out a strong position in the market even with a perceived gap in taste and quality. In response to the growing competition, shifting landscape, the company has initiated a series of turnaround efforts to re-engage customers and drive growth. A Closer Look at Starbucks' Comeback Efforts Starbucks is rolling out a broad transformation strategy aimed at reviving its business. As part of its focus on health and wellness, the company is testing new beverage options, including protein-based and coconut water-based drinks. The company’s also preparing to launch the first-phase of Green Apron Service nationwide mid-August. This initiative focuses on improving customer experience through better staffing, enhanced service, and smart queue technology designed to speed up orders. According to Chairman and CEO Brian R. Niccol, stores using Green Apron Service are already seeing stronger transaction volumes, higher sales, and faster service. Peak-hour transaction comps are on the rise, and in locations with smart queue technology, café orders completed in under four minutes have jumped by double digits. The company’s also investing in remodelling around 1,000 coffeehouses. In 2026, Starbucks plans to roll out an artisanal bakery lineup and a bold new dark roast coffee across all U.S. company-operated stores. The company also aims to expand its afternoon menu with more experiential beverages and nutritious snacks. Additionally, it’s exploring new product platforms focused on global flavors and customizable energy drinks. All this reflects a broader push to innovate and diversify its offerings. It’s clear that Starbucks is working hard towards revival through its ambitious initiatives. However, these efforts come with a hefty price tag, which is already weighing on margins and is likely to continue doing so in the near term. The key question is whether the turnaround strategy can generate returns that outweigh the costs, and how quickly that payoff is expected to yield results. Starbucks’ sales and profits over the next few quarters will be worth keeping an eye on as its turnaround strategy unfolds. How well the company performs could play a big role in where the stock heads next, making the company’s performance a key focus for investors in the near term. While the turnaround strategy is underway, the next key consideration is valuation. Does the stock offer enough upside to justify waiting, or is it time to step away. Stock Looks Overvalued Given Ongoing Struggle In terms of valuation, Starbucks is ahead of its fundamentals. The significantly higher valuation multiples suggest how pricey the stock is. This premium is difficult to justify given the company’s ongoing struggles, persistent weakness in comparable sales and margin pressure driven by the rising costs of its turnaround strategy. Source: Seekingalpha; NM signifies non-meaningful value The high price-to-earnings (P/E) and forward P/E show how pricey the stock is relative to the sector median. The elevated price-to-sales (P/S) ratio further reflects investor willingness to pay a premium for each dollar of revenue, which is not rational given its lackluster performance in recent quarters. This disconnect between valuation and business fundamentals is also evident in my DCF analysis, which clearly indicates that the stock is significantly overvalued, even under optimistic growth assumptions. Based on my DCF analysis using projected future cash flows, Starbucks appears to be trading at a 52% premium to its intrinsic value. For this analysis, I assumed a generous free cash flow (FCF) growth rate of 8%, as using an average would have been misleading due to the highly erratic FCF trend over recent years (as shown in the table below). I also applied a 2% terminal growth rate to reflect long-term economic maturity and realistic growth expectations. DCF Valuation Historical Data (in $ million- Cash from operations 1,598 5,989 4,397 6,009 6,096 (-) Capital Expenditure 1,484 1,470 1,841 2,334 2,778 Free Cash Flow (FCF) 114 4,519 2,556 3,675 3,318 FCF Growth   3857.18% -43.44% 43.78% -9.71% Assumptions   FCF Growth Rate 8.00% Discount Rate/WACC 7.43% Terminal Growth Rate 2.00% Projection (in $ million- Free Cash Flow 3,584 3,870 4,180 4,514 4,875 5,265 Present Value (PV) 3,336 3,353 3,371 3,389 3,407 3,425 Terminal Value (TV)           41,853 PV of Future Cash Flows           62,134 PV of Future Cash Flows 62,134.48 Add: Cash & Cash Equivalent 4,172.60 Firm Value 66,307.08 Less: Total Debt 17,319.10 Equity Value 48,987.98 Outstanding Shares (million) 1,136.70 Share Price (based on DCF) 43.10 Share Price as on Aug 4,- Share Overvalued -52.00% Risk to My Thesis The primary risk to my bearish view is a faster and stronger-than-expected turnaround driven by Starbucks’ aggressive transformation strategy. If the initiatives lead to a sharp rebound in comparable store sales, improved customer experience, and margin expansion, the stock could rally. Additionally, if investor sentiment around Starbucks remains resilient with continued optimism, the stock could remain at elevated levels. Also, external factors such as a broader market rally or investor appetite for consumer stocks may lift the stock beyond what fundamentals support. Summarizing My View The only factor that may be holding Starbucks’ current stock price up is investor optimism and faith in the world’s largest coffeehouse chain. Beyond that, the underlying business tells a very different story. Persistent declines in comparable store sales, margin pressures, an uncertain turnaround timeline, and a valuation that looks increasingly stretched. These signals clearly don’t suggest a buying opportunity or even a reason to hold especially when there’s no clear visibility on what could drive the stock higher or when that might happen. Instead, they suggest it may be time for investors to make a calculated exit before the market catches up with reality.