Should I invest in Starbucks after Q1 results?

Starbucks Corporation (NASDAQ: SBUX) shares remain under pressure even though the company reported solid first-quarter results this Tuesday.

Goldman Sachs lowered its rating on Starbucks

This week, Starbucks reported solid first-quarter results; total revenue has increased by 21.4% Y/Y to $8.1 billion, slightly above expectations, while the Non- GAAP earnings per share were $0.72.

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The coffee chain opened 484 new stores during the quarter, representing 4% year-over-year unit growth, and ended the period with a record 34,317 stores globally.

Global comparable-store sales have increased by 13% during the first fiscal quarter, average ticket was up 3%, and transaction growth rose 10%.

Comparable sales in the Americas rose 18% for the same period; transactions were up 12%, while comparable international sales fell 3% during the first quarter. China comparable store sales decreased 14%, and CEO Kevin Johnson said:

Although demand was strong, this pandemic has not been linear, and the macro environment remains dynamic as we experienced higher-than-expected inflationary pressures, increased costs due to Omicron, and a tight labor market.

Omicron variant of coronavirus is also one of the reasons why consolidated operating margin came in at 15.1% of sales compared with 15.4% a year ago.

Starbucks has a very good position in the market, but the company continues to face potential risks mainly due to inflation, labor costs, and covid concerns.

Coffee prices have seriously increased compared with the beginning of the 2021 year, and there are some transitory supply issues with coffee stockpiles held in ports higher than normal.

The company’s management announced it would raise menu prices this year and reduce some spending to offset higher costs. Despite this, Goldman Sachs lowered its rating on Starbucks to Neutral from Buy as the stock’s upside remains limited given the continued cost pressures across the business.

Morgan Stanley also lowered its price target to $107 from $115, while Piper Sandler dropped its target to $100 from $108.

Fundamentally looking, Starbucks trades at more than eighteen times TTM EBITDA, the current dividend yield is around 1.9%, and we can notice that this stock is not undervalued.

Technical analysis

Starbucks’ stock price has fallen more than 20% after reaching the highest level in 2021 of $126.32 on July 23, and the risk of further decline still persists.

The strong support level stands at $90; still, if the price jumps again above $110 resistance, the next target could be at $120 or even above.

Summary

Starbucks reported solid first-quarter results this Tuesday, but the company continues to face potential risks mainly due to inflation, labor costs, and covid concerns. Goldman Sachs lowered its rating on Starbucks as the stock’s upside remains limited given the continued cost pressures across the business.

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