Image source: Starbucks.
Continue Reading Below
Starbucks (NASDAQ: SBUX) shares are roughly flat over the past 12 months, but have gained roughly 147% over the last five years and handily outperformed the broader market over that stretch. As of this writing, the stock trades at roughly 27 times forward earnings estimates -- representing a 50% premium on the S&P 500 average forward earnings multiple of 18 and indicating that the coffee chain is priced for strong growth. There's a lot to like about the company and its story, but with Starbucks' big gains over the last decade and stall in stock-price momentum recently, it's worth examining factors that could send shares tumbling.
Every company faces risks, and the premium coffee chain might still meet or exceed expectations for substantial growth ahead, but these three factors pose threats to Starbucks stock.
McDonald's and Dunkin' Donuts could gain ground, especially in a downturn
Starbucks maintains a dominant position in the premium coffee store niche that it created, but it's not immune to downscale competition. Dunkin' Brands' (NASDAQ: DNKN) Dunkin' Donuts is an obvious rival, but McDonald's (NYSE: MCD) has also been devoting more effort to winning coffee customers, and initiatives like all-day breakfast and an expanding menu of specialty drinks are working in its favor. Starbucks' strength as a lifestyle brand and its upscale in-store experience support the company's premium pricing model and suggest that the chain is sufficiently differentiated to continue growth despite competitors' efforts, but that could change quickly in the event of economic downturn. Most people wouldn't stop drinking coffee even if conditions were to worsen dramatically, but a meaningful portion of Starbucks' customer base could opt for more inexpensive alternatives.
For some, that could mean heading to McDonald's or Dunkin' Donuts for their caffeine kick, while others might opt to brew at home and carry a thermos. A large regular coffee at Starbucks typically goes for $2.45 while a large McDonald's coffee costs around $1.49 and can often be had for $1 due to promotions. That difference might become more meaningful in a tougher jobs climate, and sales of the premium chain's high-margin specialty drinks would likely face even more pressure if consumer spending habits were to tighten. An economic downturn could also stymie Starbucks' plans for global expansion of its high-end Reserve stores.
Declining retail traffic could have spillover effects
At a time when consumer spending is increasingly migrating to online channels, Starbucks is threatened by residual effects of declining foot traffic at brick-and-mortar retailers. Amazon.com probably won't announce a drone delivery program for lattes and iced caramel macchiatos any time soon, but fewer customers shopping in brick-and-mortar stores means fewer people stopping into Starbucks while they're out shopping. Growth in e-commerce isn't going to slow down anytime soon, and with Amazon and other companies making moves to increase the adoption of grocery delivery services, declining retail traffic could have a real impact on Starbucks stores.
Starbucks has recognized this issue and has been working on building its digital sales channel to entice customers who aren't necessarily out and about shopping.
International growth could falter
Strong growth in international markets is cooked into Starbucks' stock price, and indications that the company might not be able to make good on its growth trajectory would likely be met with declines. The company is aiming to boost its global store count from roughly 24,000 locations today to 36,000 locations by 2021, and most of those new stores are set to open outside of America.
At the start of 2016, Starbucks had roughly 2,000 stores in China, and it's aiming to have 5,000 locations in the country by 2021. That sounds pretty good, but China has a tough regulatory market and conditions could change in ways that would be disruptive to Starbucks' strategy in the region. If the coffee company runs into food safety issues or tensions with the U.S. take a turn for the worse, for instance, its brand could be damaged in the country and its ambitious expansion goals might prove less fruitful than anticipated. China is the biggest part of Starbucks' international push, but similar dynamics could play out in other key markets including India and Japan, and setbacks would likely weigh on the company's growth outlook and share price.
We don't know what the future holds for Starbucks, but it's always good to keep an eye on the challenges that could surface for your investments.
Find out why Starbucks is one of the 10 best stocks to buy now
Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. (In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the market!*)
Tom and David just revealed their ten top stock picks for investors to buy right now. Starbucks is on the list -- but there are nine others you may be overlooking.
*Stock Advisor returns as of January 4, 2017