Speaker 1: Yeah, maybe not. Well, Jeremy starts off the video by just looking at Starbucks price. And over the past three years, Starbucks has performed pretty badly.
They’ve gone down like seven per cent. And this is compared to the S&P 500, which has gone up by about 30 per cent. But just because the price has decreased, that does not mean the business as a whole has been going really bad. Actually, if we look at the fundamentals as value investors, we want to look at the fundamentals. We we don’t want to just listen to what Mr. Market is saying and the prices this low and investors are getting worried. We want to look at the business fundamentals and look at true facts. So if we look at the facts, we can see that Starbucks fundamentals have been gaining over the past three years. Earnings have been increasing. Revenue has been increasing. Admittedly, not by a whole lot, but yes, they have been increasing and they’ve actually been expanding as well, not in the USA as much because what they’ve had to close 150 stores. But and China is opening a new store, one new store every 15 hours for the next four years. So it’s so important as investors that we look at the fundamentals, not just worry about the short term price and worry about short term use of closing the stores. We need to look at the business as a whole over the long term. And in this video, I’m going to address a few of Jeremy’s points and let you know, in my overall opinion, of Starbucks stock as a whole. First of all, one of Warren Buffett’s favorite quotes is fearful when others are greedy and greedy when others are fearful. At the moment, everyone’s fearful about Starbucks stock.
People like financial education are saying it’s terrible. They would never own it. They wouldn’t even if they had thirty dollars. So as value investors, we want to look at this type of stock. People stock there. Others are fearful about that going for pretty cheap prices. So let’s get into some of Jeremy’s points in the video and see if these points are correct or their managers based on opinion and want to finance educations. Points in the video was that Starbucks has a high PE ratio or has had a high PE ratio. Well, first of all, Starbucks does not have a high PE ratio, especially in the US market, which is what we should be comparing it to because it’s a United States stock. So Starbucks PE ratio is sixteen point eighty one, whereas the overall US markets PE ratio is twenty five point seven. So it’s about, what, nine points below the overall market PE ratio. So it is that is not high. And you also compare that to Facebook’s PE ratio, which Facebook’s PE ratio is thirty three point four. Oh, so Starbucks is about half of Facebook’s now. Even if he was talking about the PE ratio in the past, I don’t get why this is relevant at all to Starbucks. Current PE ratio in the financial education goes on to talk about poor quality customer service from Starbucks, and he gives an example of how he went to a Starbucks store and the product tasted like chemicals. And just because you had one bad experience of going to a Starbucks store and getting a poor quality product, it does not mean that across the board they have poor quality products and poor quality customer service. In fact, I think it’s quite the opposite. These are reasons why they charge six dollars for a Frappuccino and it only cost them one dollar. It’s because they deliver good quality customer service and a good quality product over the long term. That’s how they developed the brand reputation. So the reasoning behind poor quality customer service, I don’t see it. In fact, I think it’s quite the opposite end. Point number four is increased competition for Starbucks stores. And I actually do think this is a very fair point made by Jeremy for financial education. But the two examples given I don’t think is fair. First of all, gas stations and McDonalds is not Starbucks competitors. Starbucks is known as having a sort of cool brand to it, whereas McDonald’s is that sort of low class brand.
You know, your Instagram isn’t going to be filled up with a Frappuccino that you just bought from, you know, a gas station. It’s going to be filled up with something that’s from Starbucks store. It’s a little cooler they use Starbucks competition is increasing, especially as the economy gets stronger. And this is something we need to pay close attention to as shareholders of Starbucks. The next point that Jeremy makes is that the economy is getting stronger and this will somehow negatively affect Starbucks stock. And I really don’t see this at all. I think as the economy gets stronger, it’s only going to positively affect Starbucks stock. Yes, maybe over the short term it hasn’t done so well, but over the long term, it will benefit Starbucks because the economy stronger because people have more money. And what do people do when they get more money? They spend out on stuff like Starbucks on six dollar Frappuccino? What that does is bring bring in more revenue and earnings for the shareholders. And Starbucks price over the long term will go up if the economy is stronger. But what we really need to worry about is the economy getting weaker and a recession happening. This is when the consumers have no money to spend on discretionary items and Starbucks delivers less earnings. And what this means is the price drops. Another negative brought up by Jeremy is that China’s comparative sales have been decreasing. And I do think this is an issue that we need to be slightly concerned about. But first, we need to look at the reasons behind why the sales have been decreasing. And Starbucks say that because they have been opening up so many new stores, the new store customers have been cannibalizing some of their also customers. And this makes perfect sense. If you think about it logically, if you open up a new store, say, three streets down the road from the old store, some of the new store customers are going to be from the old store because it might be slightly more convenient to go to the new store and might have a better location, less walking, or might just be a better quality store. But either way, the earnings and the revenue are still going to Starbucks overall. I don’t think this is a long term issue that we should be concerned about. I think we should take a long term point of view with regard to Starbucks in China. And the long term point of view is that China’s population is slowly becoming more and more richer. People are rising out of the lower class to the middle class at rapid rates.
The GDP is something like six to seven per cent, which is increasing this lower class, the middle class turnover. And what this means is that more and more people are going to be able to afford to go to higher class stores, stores like Starbucks, and pay their six dollars for a Frappuccino instead of going to McDonald’s or gas stations. So overall, I think this is going to benefit Starbucks stock in China and Starbucks are looking to capitalize on this. There have been nothing new store every 15 hours or so over the long term. I think China’s growth is only going to increase and only going to get beat up for Starbucks stock that make projections that over the long term, the growth in earnings is 12 percent. So that’s pretty good. So what do I think of Starbucks stock? I personally like it because one of the things that Warren Buffett looks for on a stock is a competitive advantage. And Starbucks actually has a really big competitive advantage over its competition. And what that does is its brand name and its brand reputation and its brand reputation for having good quality products. There’s a reason why they charge their six dollar for Frappuccino or five dollars or whatever it is. It’s because they deliver better quality products and its people consider it cooler to go to Starbucks stocked in another store. That’s a massive advantage you have over competition if you can charge a lot more for the same product or slightly better quality product than competitors. Now I want to do an expected return calculation of Starbucks stock or what can we expect to get over the long term as a Starbucks shareholder? Obviously, this is not over the short term. People are going to be fearful of the short term because of issues like closing a hundred and fifty stores and comparative sales decreasing, which is perfect for US investors. We want people to be fearful. We want that price to shoot down as low as it can go. First of all, here is the formula I used to get expected. Return price is fifty one point twenty four dollars. Earnings for Starbucks is three dollars. But I’m going to be conservative and say Onas earnings is two point fifty and we got our minus. The growth rate, the growth rate Starbucks expect over the long term is 12 percent. But I’m going to be really conservative and say six per cent is plugged into our formula and we get an overall return of ten point eight percent. Now, is this good? Well, let’s compare it to the market’s overall return. The market’s overall return is four per cent.
So do you want to own Starbucks stock? Maybe not. Maybe if you don’t want a return, that’s more than double that of the markets they maybe don’t own. But I like that return. And Jeremy also said he wouldn’t own the stock if it costed him thirty dollars to owner. And so let’s plug in that 30 lower priced into the formula and see the expected return that we can expect to get. And that is eighteen point five per cent. That’s more than four times that of the market. So. And for those further interested in Starbucks stock, I’d recommend watching this guy called Finckel and talk about a type that on YouTube, Starbucks stock spin, and he does a very good in-depth analysis on the fundamentals of Starbucks stock and what you can expect to get if you own Starbucks.