Should You Buy Starbucks Stock While It's Down 41% From Its All-Time High?

Shares of Starbucks (NASDAQ: SBUX) have poured a grande-size dose of disappointment, down more than 41% from their all-time high nearly three years ago.

The coffeehouse leader has struggled to navigate a sales slowdown amid shifting consumer spending, leading the market to question whether the days of caffeine-fueled high growth are over.

At the same time, it's hard to bet against this industry leader, supported by its globally recognized brand. The current volatility and poor market sentiment could offer investors an opportunity to pick up shares of a great company at a discount.

Is there a good case for adding Starbucks to your portfolio? Let's explore what the data suggests.

A rough start to 2024

By several measures, Starbucks is going through one of the most challenging periods in its history. The metric that stands out and helps explain the poor stock performance is likely the 4% decline in global comparable-store sales (comps) during the recently reported fiscal second quarter (for the period ended March 31).

Similarly, global comparable-store transactions fell by 6%, including a 7% drop in the core North American region, only partly offset by higher pricing.

Outside of the pandemic lockdowns in 2020, this was the worst quarter for comps since the global financial crisis nearly 15 years ago. Management has cited several headwinds to describe the operating backdrop, including the Middle East conflict, a weaker-than-expected economy in China, and a more cautious consumer in the United States.

The impact has translated down the income statement. The second-quarter adjusted global operating margin of 12.8% fell from 14.2% from a year earlier, while adjusted earnings per share (EPS) of $0.68 were down 7% from last year.

Full-year guidance leaves a lot to be desired. Starbucks expects comps growth to be in the range of a low-single-digit decline to flat for 2024, a downward revision from its previous target range of 4% to 6% growth.

At the same time, the company is moving forward with plans to increase its global store count by 6% this year. That should be enough for top-line net revenue to still climb in the low single digits this year as part of the official outlook. Starbucks is now forecasting flat to low-single-digit EPS growth this year from the $3.54 result in 2023.

Image source: Getty Images.

Can Starbucks turn things around?

The good news is that despite the rocky trends, Starbucks remains profitable with the strategic flexibility to get back on track.

Comments by management continue to project optimism that conditions will improve, with product innovation to bring in new and casual consumers, who are seen as important to the company's long-term success. Steps like focusing store investments on the most valuable locations or making adjustments to the menu can go a long way toward driving earnings higher.

The first step to rebuilding confidence will be signs that comps are stabilizing and margins rebounding. Whether that materializes over the next few quarters or into 2025, it's fair to assume the stock price will remain volatile in the near term.

The other concern when looking at Starbucks is its current valuation. Shares are trading at around 20 times the midpoint of management's 2024 EPS guidance as a forward price-to-earnings (P/E) ratio. While the level is below the average for the metric over the past decade, it's also back to a range from two years ago.

The bearish argument for Starbucks is that if its outlook today is worse than where it was in 2022, the stock has room to trade at a deeper discount reflecting the weaker operating and financial backdrop. One interpretation here is that despite the sell-off, Starbucks stock might not be significantly undervalued yet.

SBUX PE ratio; data by YCharts.

A cautiously bullish assessment

I'm taking a cautiously bullish view on shares of Starbucks. The potential for results over the next few quarters to outperform a lowered bar of expectations could be enough to jump-start a sustained rally.

There are plenty of risks to consider, including the possibility that the economy deteriorates, further pressuring the company's sales. Still, a position in the stock today near its two-year low could work for investors in the context of a diversified portfolio.

Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy .