A Malaysian bank has issued a sell recommendation for Starbucks shares, citing the impact of the Covid-19 pandemic and the rising cost of living on consumer spending.
Bank Rakyat Malaysia (BRM) said in a note on Friday that it expects Starbucks to face lower demand and margins in the second half of 2023, as consumers cut back on discretionary spending and switch to cheaper alternatives.
The bank said that Starbucks’ growth prospects are also limited by its dependence on the US market, which accounts for more than half of its revenue, and its exposure to currency fluctuations and geopolitical risks.
“Starbucks’ valuation is also stretched at current levels, given its high valuation multiples compared to its peers and historical averages,” BRM said.
The bank lowered its target price for Starbucks shares from RM 100 to RM 80, implying a downside of 18 per cent from the current price of RM 97.50.
BRM also advised investors to sell other consumer discretionary stocks, such as Unilever, Nestle, Procter & Gamble and Coca-Cola, as they face similar challenges from the pandemic and inflation.
The bank said that it expects consumer discretionary stocks to underperform the broader market in 2023, as they have lower earnings growth potential and higher sensitivity to economic downturns.
“Consumer discretionary stocks are also vulnerable to changing consumer preferences and behaviours, such as increased online shopping, health consciousness and environmental awareness,” BRM said.