Analysts Bullish On Starbucks Despite Fast-Moving Chinese Competition

New sell-side commentary suggests Starbucks Corporation SBUX's future is bright despite growing competition in China.

The Analysts

KeyBanc Capital Markets analyst Eric Gonzalez maintained an Overweight on Starbucks with a $70 price target. 

Tigress Financial's Ivan Feinseth commented on the coffee stock in a note. 

Startup Luckin Coffee Threatens Chinese Plans 

With China being Starbucks' second-largest market and a relatively new one at that, fierce competition from startup Luckin Coffee has become a front and center focus, Gonzalez said in a Tuesday note.

Luckin Coffee, a company that did not exist 15 months ago, now operates over 2,000 stores in China and is expected to reach 4,500 stores by the end of the year As of January 2019, Starbucks operated 3,521 stores in China.

Luckin is targeting lower-cost real estate and is able to offer high-quality coffee at an affordable price to its core audience of young professionals, Gonzalez said. It's a technology-forward company whose data capabilities could rival that of the best U.S. fast food companies, he said. 

Luckily for Starbucks, the coffee industry is still in its infancy in China.

“That said, the opportunity is large, with room for both competitors to thrive long-term. China per-capita coffee consumption is less than one cup/year compared to 300 cups in the U.S.,” the analyst said. 

Uber Eats Partnership Grows 

Starbucks’ move to expand its partnership with Uber Eats is an encouraging sign for the company, said Tigress Financial Partners analyst Ivan Feinseth.

Uber Eats is launching Starbucks delivery in San Francisco starting Wednesday, to be followed by expansion into other major U.S. cities and a test program in London. The company plans to offer delivery service from nearly 25 percent of its U.S.-owned stores in seven cities by the spring. 

“Today’s announcement continues the rollout initially started in Miami last September and offers almost all of Starbucks’ menu items for delivery within 30 minutes for an initial $2.49 booking fee,” Feinseth said.

The analyst said the Starbucks initiative follows the successful rollout of a number of other expansion plans, including opening its fourth premium cafe in New York City. Feinseth cited ongoing expansion in China — where the company will have 6,000 new stores by the end of 2022 — and its recent licensing deal with Nestle S A/S ADR NSRGY to expand greater in-home food consumption as key catalysts for Starbucks.

“I believe significant upside exists from current levels and continue to recommend purchase." .

Starbucks shares were up 1.59 percent at $66.43 at the close Wednesday. 

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