Over more than five decades Starbucks(NASDAQ: SBUX) has become a ubiquitous coffeehouse chain with one of the world's most recognizable consumer brands. And shareholders who've held on along the way have also been rewarded thanks to a steadily rising stock price.
As of this writing, this top restaurant enterprise carries a market cap of $100 billion. That's after shares have fallen 30% from their peak price, which was set in July 2021.
Starbucks' biggest bulls hope that another milestone can be achieved in the long term. Can this industry leader increase 10-fold to reach a trillion-dollar market cap by 2050?
Realistic expectations
In the past 25 years, Starbucks saw its market cap expand by 1,600%. For the business to get to a $1 trillion valuation by 2050, a milestone that today only seven companies have hit, its market cap will need to rise by 10-fold. That translates to a 9% yearly increase.
I believe this is a reasonable outcome. Starbucks has grown at a much faster pace historically, but it makes sense to expect this rate to slow down as the business further penetrates markets across the globe, resulting in a shrinking expansion opportunity set.
Starbucks' durability is key
Just because the numbers make sense doesn't automatically mean Starbucks will reach the coveted $1 trillion group. Investors need to focus on some very important factors that matter over the long term.
Starbucks' most valuable asset is its powerful brand recognition. Thanks to its innovative menu offerings and consistent service, the business has remained relevant over an extended period of time. The key question centers on whether the company will still be relevant two or three decades from now.
Management has done a wonderful job at fostering the brand's image. In the past decade, it's been strengthened by ongoing investments to bolster its digital foundation in an effort to better serve consumers.
Achieving steady and consistent growth is another critical variable to be mindful of. With 38,587 stores worldwide, investors might assume Starbucks is tapped out when it comes to potential expansion opportunities.
That doesn't seem to be true, though. Executives see the business having 55,000 stores open by 2030. They're bullish on the Chinese market, which has a burgeoning middle class. And even in the mature U.S. market, the plan is to open about 3,500 more locations over the long term.
It's also important that Starbucks can post healthy same-store sales gains. Increasing foot traffic, particularly at less popular times during the day, will be vital. Plus, Starbucks will need to maintain its pricing power, striking the right balance between prioritizing profitability and not alienating its customer base.
Changes in valuation
As of this writing, Starbucks shares are way below their all-time high. This means the current valuation is attractive. The stock trades at a compelling forward price-to-earnings (P/E) ratio of 21.9.
I won't pretend to have any clue as to what the valuation will be 26 years from now. We've seen the overall market, as represented by the S&P 500, carry a higher P/E ratio over time. This trend could continue, or it might not. Changes in interest rates play a prominent role, but this is unknowable.
If we simply assume that Starbucks' valuation is the same in 2050 as it is today, we need the company's market cap to increase at a 9% compound annual rate to get to the $1 trillion mark. Based on the company's remarkable historical performance, I think this outcome is totally in the realm of possibility.
But even if your time horizon is much shorter, say five or 10 years, Starbucks still looks like a smart stock to buy.
Should you invest $1,000 in Starbucks right now?
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
