HomeBusiness3 reasons to buy this beaten growth stock like there's no tomorrow

3 reasons to buy this beaten growth stock like there’s no tomorrow

Invest in Starbucks (NASDAQ:SBUX) Stocks have been a frustrating experience lately. The shares are up just 12% in the past five years – severely lagging the broader sector S&P500‘s 77% gain in that time.

However, don’t be discouraged. It is always best to maintain a long-term mindset when looking at potential investments. With this framework in mind, it’s actually very easy to be optimistic about Starbucks.

Here are three reasons to buy this beaten copy restaurant inventory straight away.

1. Strong brand recognition

Starbucks has been around for over 50 years. That’s an impressive feat in the hyper-competitive restaurant industry, an industry with an alarmingly high failure rate. The company has been successful for so long because it has a competitive edge – characteristics that allow it to maintain its edge over its peers.

Starbucks’ moat comes from its strong brand recognition. The company sells caffeinated beverages and various foods, which can be seen as commoditized products with no real differentiation. But the company can charge higher prices because it has found a way to elevate its brand image in a way that resonates with consumers.

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I think it would be a huge challenge for a newcomer in the industry to reach the status of Starbucks. This is something that takes years and decades to develop, thanks to consistently delivering for customers.

The brand is getting a boost from the company’s intense focus on its digital investments. It has one of the most successful loyalty programs in corporate America, with 34 million active members in the US, accounting for a significant portion of its revenue. This not only drives loyalty by encouraging repeat purchases, but it also creates a valuable engagement channel.

2. The growth opportunities

Starbucks currently has 38,587 locations around the world. And it posted revenues of $34 billion in fiscal 2023 (ending Oct. 1). This is a vast, scaled-up entity. But don’t be discouraged; there is still meaningful growth potential.

As part of the Triple Shot Reinvention plan, executives said they believe Starbucks could have 55,000 stores worldwide by the end of the decade. Much of that growth will come from China. But even in the US, Starbucks’ mature home market, the company plans to open more than 3,000 new stores in the long term.

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An important part of the strategy is opening smaller, digitally focused stores. Some consumers aren’t as interested in hanging out at a Starbucks as they were a decade or more ago. The plan is to serve these customers in the way that is most convenient for them.

This outlook makes it easy to be optimistic that Starbucks can improve its financials. The leadership team forecasts revenue and profit per share will increase annually by 10% and 15% respectively in the long term.

3. Its reasonable valuation

In addition to a powerful brand and growth potential, its attractive valuation is another reason to consider purchasing the shares. Investors can buy shares at a price-to-earnings (P/E) ratio of 21. That’s in line with the broader S&P 500.

Just over two years ago, in early 2022, the stock posted a price-to-earnings ratio of over 40. Today, that enthusiasm has diminished considerably.

However, Starbucks is still extremely profitable. It pays a dividend that currently yields 2.6%, and the payout has increased for 13 consecutive years. The company is also buying back significant shares – $1.3 billion in the first quarter of 2024 ending December 31.

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These capital allocation decisions increase returns for investors, and they do a smart idea to buy Starbucks today.

Should You Invest $1,000 in Starbucks Now?

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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds and recommends positions in Starbucks. The Motley Fool has a disclosure policy.

3 Reasons to Buy This Beaten Growth Stock Like There’s No Tomorrow was originally published by The Motley Fool

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