Where Will Starbucks Stock Be in 5 Years?

The stock market has been quite generous to investors so far this year. The S&P 500 has gained an impressive 14% while the Nasdaq Composite has notched a slightly better 15.7%.

All told, investors have had a lot to smile about in 2024. Unfortunately, Starbucks (SBUX 1.55%) investors haven’t fared so well. Shares of the coffee chain stock have plummeted by 22% so far in 2024, vastly underperforming the broader market.

Let’s take a look at what’s going on with Starbucks, and explore what it could mean for a longer-term investment.

What’s the problem with Starbucks?

The image below was included as part of Starbucks’ first-quarter earnings report, published on April 30.

According to the image, two of management’s strategic priorities are elevating the Starbucks brand and becoming a truly global enterprise. With nearly 40,000 stores across the world, I’d say that Starbucks is by far one of the most iconic brands on the planet.

To me, Starbucks does not need to invest in building any more brand identification. Rather, management needs to take a closer look at the company’s key performance metrics and identify more concrete ways the fix the operation.

For the quarter ended March 31, Starbucks generated $8.6 billion in revenue — a 1% decline year over year on a constant currency basis. Candidly, I’d normally let a quarter of declining growth slide for a consumer discretionary business.

However, in the case of Starbucks, I think there are some real issues to unpack.

First, the company’s growth dipped across geographic demographics. Moreover, same-store sales dropped by 4% year over year due to declines in average order dollars in some regions, as well as slower foot traffic due to a “more cautious consumer environment,” according to management.

On some level, I understand that shopping patterns among consumers are going to be finicky. It’s no secret that the macroeconomic environment has been rather tough on the consumer over the last couple of years.

While inflation is starting to show signs of cooling down, it’s remained stubbornly high for quite some time. In essence, I’m not surprised to learn that consumers aren’t rushing out the door every morning to buy a $7 latte.

Perhaps the biggest red flag for me while parsing through Starbucks’ latest earnings report was seeing rewards members drop quarter over quarter.

I’m skeptical that Starbucks is going to be able to reacquire these customers and continue penetrating consumers at a high level. This could be an even bigger, systemic issue as it relates to Gen Z and millennial demographics who tend to change preferences quickly.

An interesting resolution?

Despite the precipitous decline in Starbucks stock this year, shares did witness a fleeting surge earlier this month after news broke than activist investor Elliott Management was acquiring a stake in the company.

If you’re unfamiliar, activist investors are large institutional money managers that generally identify and take positions in companies going through a rough patch. Unlike passive investing, activists typically work alongside management at their portfolio companies and try to guide them back toward growth.

Sometimes, activists will take a seat on a company’s board of directors to ensure that its suggestions to return to growth are implemented.

Where will Starbucks stock be in five years?

While I find the news about Elliott Management intriguing, I’m not personally sold that this move alone will be enough to turn things around at Starbucks.

One reason for my speculation is that Elliott has previously demonstrated a fair-weather level of commitment to some of its opportunities in the past. For example, in late 2017 the fund took a position in telecommunications company Akamai Technologies. However, only a year later in November 2018, Elliott offloaded a good chunk of its Akamai position and had completely exited its position by mid-2019.

To me, this is not a long period of time. Even if Elliott recognized a substantial gain in its position, working with a company for this short of a duration gives the impression of a trader mentality, and not one in which the investor is working to implement strategies that will continue to pay off in the long term.

Another reason I am doubtful about Elliott’s involvement with Starbucks is that the firm generally works with healthcare and technology services companies. Starbucks is largely a brick-and-mortar business with some degree of tech-enabled services via the rewards app.

Ultimately, I see Elliott’s involvement with Starbucks as a bit of a distraction.

In my opinion, the inconsistent growth at Starbucks coupled with a murky economy, and the addition of an activist investor make for one cloudy recipe.

I would not be surprised to see the stock continue falling, and I suspect that Starbucks could very well underperform the S&P 500 over the next several years unless it begins to show compelling signs of a turnaround.