Big-Name Analyst Just Went Cold on Starbucks. It’s Time to Buy This Dip

Starbucks (NASDAQ:SBUX) stock has gone from lukewarm to ice-cold in recent months. The stock is off more than 25% since peaking back in February, as investors grew optimistic about the company’s comeback prospects with new CEO and turnaround artist Brian Niccol aboard. Indeed, Niccol arguably has the most impressive resume in the entire quick-serve restaurant scene. But investors seem to be a tad more skeptical this time around, especially since it’s unclear how Starbucks can escape its multi-year slump.

At this juncture, there are no simple solutions that drag the Seattle-based coffee giant out of the gutter. After having done close to nothing in the past six years or so, investors must ask themselves how the famed coffee giant can return to its winning ways.

Though Starbucks stock seems like more of a value trap than a timely turnaround play after its latest bearish descent, I do think there’s reason to stick with the name, even as the big-name analysts turn against the stock while famed big-league money managers and hedge funds offload more of their shares.

How can Niccol and company spark a comeback for the ages?

For now, Niccol has a pretty sound plan to reheat sales at the soured coffee chain. Indeed, efficiencies and further digitization will play a significant role in the Niccol era. And while another Oleato may not hit the spot, I do think that some “out-of-the-box” innovative concepts are more key to Starbucks’ turnaround story.

You can cut down the lines at the local Starbucks all you like, but something truly innovative is needed to get more patrons in the door at a time when consumers may be less than willing to pay a premium price tag for their daily caffeine fixes.

Just last week, a big-name analyst at TD Cowen, Andrew Charles, downgraded SBUX stock to hold from buy while leaving his price target of $90 per share (around 3.5% upside from current levels) unchanged. Mr. Charles thinks Niccol has room to turn the tide, but thinks the challenges may be difficult to overcome. Most notably, higher labor costs, greater competition, and a softer consumer are challenges that Mr. Charles outlined. 

Personally, I think all such potential headwinds are already priced in those ice-cold shares of Starbucks. Indeed, recession risks, the higher cost of everything (including labor), and their impact on consumers have been a topic of discussion since the year began. And competition has been a top bearish point for Starbucks for a number of years now.

Only time will tell, but I’d be more inclined to think investors are underestimating Niccol and overestimating the severity of the already well-known headwinds facing the iconic coffee chain.

Brian Niccol’s comeback plans seem simple, but worth getting behind.

For now, nothing is striking or radical as part of the turnaround efforts. Indeed, fully automated lattes and Frappuccino’s seem to be off the table for now, even as AI and robotics become more commonplace. In any case, much of the low-hanging fruit, I think, has been spotted by Niccol, and he seems focused on picking them before committing to anything transformational. 

Indeed, leveling up operating and ordering efficiencies as well as bringing back that “people-first” approach that made Starbucks so great seems like a must before anything more disruptive ought to be considered. In any case, I think it’s a mistake to bet that Niccol will fail with his incredible track record at bringing out the best in hard-hit restaurant brands.

Investors seeking big comeback gains had better be prepared to play the long game, though, as Niccol’s efficiencies probably won’t fully work their way into the numbers overnight. Perhaps after the first steps of turnaround are complete, Starbucks will be back on the growth track as investors refocus on the China opportunity and the potential for robotic baristas.

For now, a recession and inflation could still weigh heavily on consumers’ abilities to spend money on comforts and conveniences. Though, perhaps such headwinds are clouding the long-term opportunity at hand, as a seasoned vet and legendary turnaround artist in Brian Niccol looks to pull off another historic comeback.

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