Starbucks stock on edge as fresh threats emerge ahead of earnings

Starbucks (SBUX) stock price remained in a consolidation phase as traders waited for the first quarterly earnings under Brian Niccol. After the initial surge when he was appointed in August, the stock has embraced a wait-and-see approach as investors focus on his strategy release. 

Two new threats have come up

Starbucks, the biggest coffee chain in the world, is now facing two potential big risks in the US and China. 

First, there are rumours that Luckin Coffee, the fast-growing coffee chain in China, is considering launching new stores in the US. According to the Financial Times, the company plans to do that as soon as in 2025.

Its initial focus will be in big cities that have large populations of Chinese students and tourists like New York and California.

Luckin has already started doing the groundwork for its launch, sponsoring some adverts in key sporting events. 

As such, there is a likelihood that the company will replicate its success in China to become a leading player in the US coffee industry.

A key benefit in its model is that it relies on franchises, which helps it to grow at a faster pace than other companies. This model has also helped it open over 20,000 stores a few years after it was launched. 

Another benefit is that Luckin Coffee has a long record of having a pricing advantage, while still maintaining higher margins. It has a gross and net profit margin of 55% and 7.16%, while Starbucks has 27.6% and 11.16%, respectively.

To be clear: Starbucks is still a well-liked brand in the United States, and there are chances that Luckin will not be as popular in the country. Many foreign companies that have attempted to win in the American market like Tesco, Sainsbury, and HSBC have not succeeded.

Cotti Coffee and rising competition

The second big threat that Starbucks will now contend with is that Luckin Coffee is not the only big competitor to fear. 

Cotti Coffee, a company that was established by Lu Xhengyao and Jenny Qian, who founded Luckin Coffee, has continued to gain market share in China. Recently, the company opened 10,000 stores in the country, less than three years after its launch.

Cotti Coffee has achieved this growth by replicating Luckin Coffee’s growth strategy. It has used the franchising model and focused on affordable prices.

Therefore, Cotti Coffee is a threat to Luckin and Starbucks, because most of its stores are newer and its price more affordable. Also, the company is expanding to other countries in the Southeast Asian region. 

These new developments mean that the era where Starbucks was the only game in the coffee industry has ended. 

Starbucks earnings ahead

The next important catalyst for the Starbucks stock will be its quarterly results, which will come out on Wednesday after the bell.

These will be important results because they will be the first time that Niccol has addressed analysts in an earnings call.

He will likely share his views on what to expect, and some of the top strategies that he is working on. 

According to Yahoo Finance, analysts expect the results to show that Starbuck’s revenue were flat in the second quarter at $9.3 billion. Its earnings per share is expected to drop from $1.06 to $1.03

For the year, Starbucks’ revenue guidance will be $36.5 billion, a small increase from the $35.9 billion it made a year earlier. 

The other big issue with Starbucks is that it is relatively overvalued, especially for a company that is no longer growing. Its forward price-to-earnings ratio has moved to 25.64, higher than the S&P 500 average of 21. Its multiple has moved to the highest point in months.

Starbucks also has an enterprise value-to-margin ratio of 17, higher than other companies in the industry. These valuation metrics will not matter for now since investors are more concerned about its recovery and turnaround strategy.

Starbucks stock analysis

SBUX chart by TradingView

The daily chart shows that the SBUX stock price bottomed at around $71 earlier this year and formed a double-bottom pattern. This is one of the most bullish patterns in the market in most periods. It has now crossed the important neckline is at $82.95. The stock has now formed a golden cross chart pattern, a popular bullish market sign. 

However, the stock has formed a rising wedge chart pattern, a popular bearish market sign. Also, the Relative Strength Index (RSI) and the MACD indicators have formed a bearish divergence pattern.

Therefore, the stock, will likely have a bearish breakout after its earnings. If this happens, the next point will be $90. On the other hand, a move above the important resistance point at $100 will point to more gains.

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