PepsiCo's Stock Valuation Amid Downgrade by JP Morgan: Assessing Fundamentals vs. Overcorrection

In early 2025, PepsiCo (NASDAQ: PEP) faced a significant stock price correction following a downgrade from Bank of America, which reduced its rating from "Buy" to "Neutral" and slashed its 12-month price target to $155 from $185, reported by Motley Fool. While the downgrade was initially attributed to JP Morgan in some media reports, the actual catalyst was Bank of America's analysis, which highlighted structural challenges in PepsiCo's core markets. This article evaluates whether the stock's 2.7% drop, reported by StockTwits, reflects deteriorating fundamentals or an overreaction to short-term concerns.

Fundamental Challenges: Snack Sales, Pricing, and Innovation Gaps

Bank of America's downgrade centered on three key issues. First, PepsiCo's Frito-Lay North America segment, a historic growth engine, has seen declining market share due to higher pricing eroding sales volume, according to Motley Fool. Consumers, facing macroeconomic pressures, are cutting back on nonessential items like snacks, a trend exacerbated by inflation-driven trade-offs. Second, the beverages division lacks innovation in popular categories such as low-sugar drinks and energy beverages, leaving it vulnerable to competitors like Coca-Cola and Monster Beverage, as noted by Motley Fool. Third, U.S. import tariffs and supply chain costs are squeezing margins, with PepsiCo's Q1 2025 core constant currency EPS declining 4% year-over-year, according to the company's SEC filing.

These challenges are reflected in PepsiCo's financials. GAAP earnings per share (EPS) fell 10% in Q1 2025, with foreign exchange and inflationary pressures further clouding guidance, as detailed in the SEC filing. The company now expects flat core constant currency EPS for 2025, down from prior mid-single-digit growth projections, per the SEC filing. While international markets-particularly Asia and Latin America-show resilience with 1.2% organic revenue growth, according to a Monexa analysis, North American beverage and food sales declined by 3% and 1%, respectively (Monexa analysis).

Valuation Metrics: Expensive or Fairly Priced?

PepsiCo's valuation ratios suggest a mixed picture. As of Q3 2025, its P/E ratio stands at 25.7x, above the Global Beverage industry average of 17.7x but close to its estimated fair value of 27.5x, according to the StockAnalysis valuation. This premium reflects investor confidence in its long-term brand strength and dividend history, despite near-term headwinds. The company's P/S ratio (2.14) and P/BV ratio (10.91) have also declined since 2021, indicating a more conservative valuation relative to sales and book value, as shown in the SEC filing.

However, the stock's recent drop may not fully align with these fundamentals. Analysts remain cautiously optimistic, with a consensus "Buy" rating and an average price target of $156 (implying 9.87% upside), per the StockAnalysis forecast. Firms like Barclays, Citigroup, and UBS have maintained or upgraded their targets, citing PepsiCo's strategic pivot toward wellness-oriented products and cost optimization efforts (Monexa analysis). CEO Ramon Laguarta has emphasized innovation in healthier snacks and beverages, a move that could reinvigorate growth in 2026 (Monexa analysis).

Market Overreaction or Justified Correction?

The stock's 2.7% decline following the downgrade appears to overstate the risks. While Bank of America's concerns are valid, they are already partially priced into the stock. For instance, PepsiCo's Q2 2025 results showed $22.7 billion in revenue, with international growth offsetting North American weaknesses (Monexa analysis). The company reaffirmed its full-year guidance, signaling confidence in low-single-digit organic revenue growth (Monexa analysis). Additionally, PepsiCo's dividend yield of ~2.8% remains attractive in a high-interest-rate environment, offering a buffer against volatility (StockAnalysis valuation).

The broader market context also suggests overcorrection. The S&P 500 Food & Beverage sector has underperformed the broader index in 2025, with investors favoring tech and AI-driven stocks. This sector rotation may have amplified PepsiCo's decline, even as its fundamentals remain stable.

Conclusion: A Buy for the Long-Term

PepsiCo's stock valuation appears to balance near-term challenges with long-term resilience. While declining snack sales and innovation gaps in beverages are legitimate concerns, the company's international diversification, operational efficiency, and dividend reliability provide a strong foundation. The recent price drop, driven by Bank of America's downgrade, likely reflects market overreaction rather than a fundamental collapse. Investors with a 12- to 18-month horizon may find value in PepsiCo's stock, particularly as it executes its wellness-focused strategy and navigates macroeconomic headwinds.