One customer leaves a Starbucks Coffee Shop in San Francisco, California. Robert Alexander/Getty Images
According to Bank of America, Starbucks stock could rise 21% because of its loyalty rewards program that helps it defend itself against increasing competition.
In a Monday note, the bank restored coverage for the coffee retailer by giving it a "Buy” rating.
BofA stated that Starbucks Rewards has been a tailwind for ten years, expanding Starbucks reach to new clients and increasing spending when it does.
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Starbucks stock could continue to trend higher because Starbucks' loyalty rewards program helps drive growth, and protect it from increased competition, Bank of America stated in a Monday note.
The bank reinstated coverage for Starbucks with a "Buy” rating and set $135 as the price target. This represents potential upside of 21% since Friday's close.
According to the bank, a large portion of the upside in the stock is due to the company's growing earnings from US locations. This was due to the bank's scale advantages in specialty coffee markets. According to the note, Starbucks has nearly 9,000 locations across the US. It will be hard for new coffee vendors to compete with Starbucks.
"Few ideas have ever been able achieve meaningful scale. BofA stated that the result was significant scale advantages and supracompetitive returns for chains that have them.
Starbucks loyalty rewards app has added to its competitive edge. It has been a great tool for driving growth and fighting off competitors. BofA stated that Starbucks Rewards has been a tailwind for ten years, expanding Starbucks' reach to new customers and increasing spending when it does.
According to the bank, Starbucks app growth has been a key indicator of quarterly sales growth. In the third quarter, Starbucks Rewards growth was sharply higher. This bodes well for underlying demand.
The stock's current valuation is driven by headwinds in China, where Starbucks is opening new stores rapidly despite strong earnings in the US. BofA stated that China worries are exaggerated as previous economic slowdowns in China had less impact on Starbucks than those of its local competitors.
BofA noted that Starbucks stock is lower than its five, ten, and fifteen-year valuation averages relative the S&P 500. This is due to fears of slower growth in China. We believe that the historic [valuation] range is still relevant, given that Starbucks' growth rate has been consistently higher than that of the wider market.
Starbucks shares rose as high as 2% Monday and are up around 6% year-to date.
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