MW Starbucks downgraded to underperform as broker sees too much froth in the stock price

By Jules Rimmer

Jefferies questions China deal speculation as well as company priorities

A Starbucks rally has run too far, says one brokerage that slapped an underperform rating on the coffee retailer.

Since its last quarterly earnings release Starbucks (SBUX) share price has outperformed the S&P 500 SPX with a 12.5% rally, beating the index by three percentage points. For the Jefferies research team, led by analyst Andy Barish, the stock is running way ahead of expectations, though, and they have downgraded their recommendation to an underperform from hold.

The Jefferies target price was retained at $76, some way below its present level of $92, but even at this lower price Starbucks would be trading at 26 times its forecast earnings per share in 2026, almost 20% above the prospective multiple for the S&P 500. The firm is expecting Starbucks' fiscal third-quarter earnings of 53 cents a share, versus the consensus at 65 cents.

The Jefferies call runs against consensus generally, as one of only four sell recommendations on the share among the 37 analysts who contribute to FactSet. The remaining analysts are split evenly between buys and holds although given the mean target price is only $93, it suggests sentiment is more lukewarm.

One of the reasons behind Starbucks recent outperformance is the $10 billion price tag rumored to be attached to the China operations it's in the process of selling. Jefferies thinks this is way too ambitious given its assessment of the current operating margin of that business is zero. Assuming a 10-15 times multiple of its earnings before interest, depreciation and amortization, Jefferies reckons a price between $2 billion and $2.5 billion is a more realistic expectation. Jefferies notes, as will prospective private-equity buyers, that the coffee environment in China is increasingly competitive.

The Jefferies note cites credit/debit card data, app data and foot traffic as justification for its view that fundamentals are not improving as fast as Wall Street expects. It highlights complex operational and staffing issues that will take longer for management to address than previously thought and require significant investment also.

The Jefferies team is also doubtful about management's strategic priorities. These appear to focus on hot beverages consumed in-store whereas the industry appears to be shifting more toward cold drinks and a focus on the drive-thru experience.

-Jules Rimmer

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July 17, 2025 05:05 ET (09:05 GMT)

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