Starbucks Corporation (SBUX) Tanks on Analyst’s Downgrade

Starbucks Frappuccino Beverages
Image source: Starbucks

Starbucks Corporation (NASDAQ:SBUX) experienced the biggest drop in more than two months on Tuesday after an analyst at Deutsche Bank AG (USA) (NYSE:DB) downgraded his rating on the company’s stock.

The stock price of Starbucks dropped as much as 4.2% to $58.37 per share earlier today—the biggest intraday drop since February 5. Starbucks managed to recover some of its losses in the afternoon trading. The stock was trading at $59.49 per share around 2:59 in the afternoon in New York.

Starbucks stock is fairly valued

Deutsche Bank analyst Brett Levy downgraded his rating for Starbucks to Hold from Buy and lowered his price target to $64 from $70 per share.

According to Levy, the company’s risk/reward profile is unattractive because of the elevated expectations of investors in the near-term, its operational changes and premium stock valuation.  He believes that the stock is currently valued fairly.

“We continue to respect the company’s longer-term strategy, and remain impressed with Starbucks’ industry leading SSS growth and solid profit growth, but believe these factors are fully priced into the shares at this time,” he said.

Loyalty program changes could lead to slower traffic

Levy warned that Starbucks same-store sales comparisons could be impacted negatively by its structural changes. He added that the changes to its domestic loyal program could also lead to a slower traffic over the next quarters.

According to him, “The April 12 loyalty-program changeover could result in modest disruptions to U.S. near-term traffic and sales trends, in our opinion. We do not welcome this potential added risk to the story.”

“Longer-term, we believe Starbucks is making the right financial and strategic investments, but we would prefer to find a better entry point on its shares,” added Levy.

Starbucks implemented a new system for its loyalty program wherein customers are rewarded based on how much they spent. Before customers get reward based on the frequency of their purchases.

Under the new systems customers will earns two stars for every dollar spent. Customers previously earn one star per transaction. Customers didn’t like the change and expressed their sentiments on the social media.

The company’s loyalty program has more than 12 million active members in the United States. The company recently announced its plan to roll out a prepaid card through Chase by the end the year to expands its loyalty program. It also partnered with several companies to allow people earn points to use in the Starbucks Rewards program.