Starbucks (SBUX) stock price has become unloved and unwanted as the company continued to face elevated challenges in its key markets. After peaking at $112.25 in May 2023, the stock has tumbled by over 33% to the current $74.57. In contrast, the S&P 500, Dow Jones, and Nasdaq 100 indices have soared to their record highs.

Starbucks is facing major headwinds

Starbucks, the biggest coffee chain company in the world, has been in a crisis in the past few years. For example, Howard Schulz returned to the company as the interim CEO as the business faced substantial risks. It was his third time to return as the CEO.

He then exited the company, leaving Laxman Narasimhan as the Chief Executive. The hope was that the new executive would accelerate the company’s turnaround.

However, there are signs that the business is not turning around as quickly as analysts were expecting. The most recent results showed that its business was facing substantial headwinds in its key markets. 

Its closely watched same-store sales dropped by 4% in the first quarter. Its North American figure dropped by 3% while the international division fell by 6%. 

The company’s North American revenue remained steady at $6.38 billion while its operating profit dropped by 6% to $1.14 billion. Its operating margin dropped from 19.1% to 18%, showing how badly the business is doing.

The international division is also not doing well as the revenue fell to $1.75 billion and its operating margin dropped from 17% to 13.3%. 

Luckin Coffee competition

A key challenge that Starbucks is facing is that the Chinese market has become highly competitive. For example, Luckin Coffee has grown its store count in China to over 18,500, almost double its 2022 store count. Many people in China have continued to select Luckin as evidenced by its 41% revenue growth in the last quarter.

Starbucks is facing additional challenges, especially in the US where wages are growing. Just recently, California started implementing the AB 1228 laws that forced restaurant chains to hike the minimum wage to $20 an hour.

Companies like Starbucks have often responded to these laws by hiking prices. Now, with the economy slowing down, there is a question about how high prices can rise.

Analysts expect that Starbucks revenues rose to $9.26 billion in the second quarter. For the year, the average estimate is that revenue will rise by just 2.2% to $36.77 billion followed by $39.65 billion in 2025.

Starbucks is still fairly valued despite the recent crash. It trades at a forward PE ratio of 21, in line with the S&P 500 index, whose earnings grew by 5.4% in the first quarter. 

Therefore, there is a likelihood that the Starbucks share price will retreat as traders focus on its upcoming earnings on July 30th. The stock will then rebound if these numbers show that the company is recovering.

Starbucks stock price analysis

(Click on image to enlarge)

SBUX chart by TradingView

The weekly chart shows that the SBUX share price has dropped for three straight weeks as concerns about its growth continued. Most importantly, it has now formed a death cross pattern as the 50-week and 200-week moving averages have crossed each other. In most cases, this is one of the most bearish signs in the market. 

The stock also formed a double-top pattern around the $112.25 level and its neckline has moved to $65.31. Therefore, the most likely scenario is where the stock continues falling as sellers target the key support at $71.45, its lowest point on May 13th. A break below that level will see it drop to $65.30.

More By This Author: