Is Starbucks Stock Overvalued Or Undervalued?

Starbucks Corporation (NASDAQ:SBUX) shares have lagged the S&P 500 in 2021, generating a year-to-date total return of 8.9%.

At this point, investors may be wondering whether Starbucks shares are undervalued after their recent performance.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is at about 29.4, nearly double its long-term average of 15.9.

Starbucks' PE is 37.7, well above the S&P 500 average as a whole. Starbucks' PE ratio is also up 11.8% over the past five years, suggesting the stock is priced at the high end of its historical valuation range.

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Growth: Looking ahead to the next four quarters, the S&P 500's forward PE ratio looks much more reasonable at just 21.6. Starbucks's forward earnings multiple of 33.4 is still more than 50% higher than the S&P 500’s, making Starbucks look overvalued.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 0.9; Starbucks’s PEG is 1.12, suggesting Starbucks is slightly overvalued after accounting for its growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.19, well above its long-term average of 1.63. Starbucks’s PS ratio is 4.48, more than 40% higher than the S&P 500 average as a whole.

Finally, Wall Street analysts see some value in Starbucks stock over the next 12 months. The average analyst price target among the 29 analysts covering Starbucks is $125, suggesting 9.6% upside from current levels.

The Verdict: At its current price, Starbucks stock appears to be slightly overvalued based on a sampling of common fundamental valuation metrics.