Starbucks' Undervalued Potential: Reassessing Laxman Narasimhan's Leadership and the Stock's Hidden Value

Starbucks Corporation (SBUX) has long been a bellwether of global consumer trends, yet its stock price has lagged behind its fundamentals under CEO Laxman Narasimhan's leadership. Despite record revenues, margin expansions, and strategic milestones, the stock trades at a discount compared to peers. Is this a buying opportunity, or does the skepticism reflect deeper concerns? Let's dissect the narrative.

Laxman Narasimhan's Leadership: Progress Amid Challenges

Narasimhan took the helm in March 2023, succeeding Howard Schultz's interim leadership. His tenure has been defined by two contrasting phases:

1. Early Wins (2022–2023):
2. Revenue Growth: Fiscal 2023 saw consolidated revenues hit $36B, up 12% year-over-year, with North America and International segments thriving.
3. Margin Expansion: Operating margins improved to 16.3%, driven by pricing, efficiency gains, and the $1B "Reinvention" strategy focused on employee benefits and store innovation.
4. Store Milestones: Starbucks surpassed 20,000 international stores, reaching a total of 38,000 globally, with the Starbucks Rewards program growing to 32.6M U.S. members.

1. Recent Struggles (2024–2025):
2. Margin Pressure: Fiscal 2024 saw margins contract to 12.8% due to higher labor costs, promotions, and currency headwinds. Q2 FY2025 reported a further 590-basis-point margin drop to 6.9% amid restructuring.
3. Transaction Declines: Global comparable store sales fell 1% in Q2 FY2025, with North America down 1% and China flat despite store count growth.

Fundamentals: Stronger Than the Stock Suggests

Despite the near-term issues, Starbucks retains compelling long-term advantages:

1. Global Scale and Resilience:
2. Store Network: 40,789 stores globally (53% company-operated), with China (7,758 stores) and the U.S. (17,122 stores) as growth anchors.

3. Loyalty Engine: Starbucks Rewards members grew 6% to 32.8M in the U.S., driving repeat business and higher average ticket prices.

4. Strategic Reinvestment:

5. The "Back to Starbucks" initiative aims to simplify menus, streamline operations, and reduce costs. Restructuring 1,100 roles and appointing a new CFO signal a shift toward agility.

6. The China Coffee Innovation Park and leadership changes (e.g., Molly Liu as co-CEO) underscore a focus on local relevance.

7. Financial Discipline:

8. Starbucks maintains a 20% CAGR on dividends (currently $0.61/share) and has reduced shares through repurchases.
9. A P/E ratio of 35.82 (as of July 2025) remains below Chipotle's 53.03 but above McDonald's 23.71, suggesting it's priced for moderate growth.

Why the Stock Is Undervalued

The current stock price (~$95) reflects short-term execution risks but overlooks structural strengths:

• Margin Recovery Potential: Post-restructuring, labor costs and promotions should stabilize, allowing margins to rebound toward historical levels.
• China's Untapped Potential: While comparable sales dipped 11% in Q2 FY2024, China's 6% store growth and urbanization trends bode well for long-term growth.
• Brand Resilience: Starbucks' premium coffee ecosystem and global brand equity remain unmatched, with a 50% Total Shareholder Return outperformance vs. the S&P 500 since 2022.

Investment Thesis: Buy the Dip

Starbucks stock is attractively priced at a 35.8x P/E, below its five-year average of 42x. Key catalysts include:
1. Margin Turnaround: A return to 15–16% operating margins could lift EPS significantly.
2. Store Expansion: 5–6% annual store growth (targeting 60,000 globally by 2030) will drive top-line growth.
3. Dividend Stability: With a 2.79% yield, the dividend provides a floor, even in volatile markets.

Risks to Consider

• China Competition: Rising local brands like Luckin Coffee could pressure margins.
• Labor Costs: Wage inflation and unionization efforts may weigh on profitability.
• Consumer Sentiment: Economic downturns could dampen discretionary spending.

Conclusion

Starbucks' stock has been punished for short-term execution hiccups, but its global scale, loyalty-driven model, and reinvestment in efficiency make it undervalued. Investors should view dips below $90 as opportunities to accumulate shares, with a long-term horizon aligned with Narasimhan's strategic vision. The key question isn't whether Starbucks can recover—it's whether the market will recognize its enduring value soon enough.

Investment Grade: Buy with a 12–18 month horizon. Target price: $115–$120.