Starbucks (NYSE:SBUX) finds itself somewhat out of favor at the moment, with shares taking a more than 2% dip on a turbulent Thursday in the broader markets. The stock has seen a decline of around 17% from its peak in May and nearly 22% from its all-time high last seen in July 2021.

But this recent slide isn’t solely due to overall market weakness; a noteworthy downgrade from a widely followed analyst has also contributed to investor hesitation. Add the escalating competition in the Chinese market to the mix, and it becomes apparent that many investors are opting to sell now and ask questions later.

However, I firmly believe that giving up on Starbucks as we enter the pumpkin spice season would be a significant error. Not only could the allure of pumpkin spice lattes provide a boost to the company’s shares, but new menu offerings, continued innovation, and a potential turnaround in consumer sentiment could help Starbucks exceed expectations, which are currently somewhat muted.

A Notable Analyst Downgrade Adds to Starbucks’ Challenges

Specifically, TD Cowen downgraded Starbucks stock from Buy to Hold on Tuesday, also reducing its price target from $117 to $107. The $10 per-share reduction was attributed to macroeconomic challenges in China—a market that remains a vital driver of growth for Starbucks. TD Cowen also noted concerns that Chinese competitors might encroach on Starbucks’ territory.

Undoubtedly, the Chinese economy is facing some challenges. While government stimulus measures might help stimulate the economy, the market appears to lack confidence in Starbucks’ ability to maintain robust same-store sales growth in a region that could remain sluggish for several quarters.

As for potential rivals in China, I’m less convinced of their threat. Certainly, Luckin Coffee is a popular local coffee chain known for its willingness to innovate with concepts like alcoholic coffee. However, citing Chinese competitors as a significant headwind for Starbucks may underestimate the strength of Starbucks’ brand.

Don’t Underestimate Starbucks’ Brand Power in China

Starbucks is undeniably one of the most formidable brands globally, not just in the U.S. but across the world. Considering China’s fondness for American brands, I don’t see Luckin as a substantial long-term threat to Starbucks as it continues to expand in China.

While some Chinese consumers may prefer more affordable coffee options, a Starbucks cup makes a statement. In many ways, the green mermaid logo serves as a status symbol. In a nation that places a premium on status, it’s unlikely that a Chinese rival can dethrone Starbucks’ dominance. Additionally, Starbucks’ brand may be even more potent in China than in countries like the U.S. or Canada, where coffee shops are plentiful.

Conclusion on Starbucks Stock

In conclusion, I view the TD Cowen downgrade as somewhat overstated, presenting an opportunity for bargain hunters to acquire the stock at a reduced price.

In terms of valuation, Starbucks stock currently trades at a P/E ratio of 28.84, offering an attractive 2.28% dividend yield. With a recent 7.5% quarterly dividend increase and the potential to overcome challenges, especially in China, Starbucks appears to be a compelling “growth at a reasonable price” (GARP) investment.

While there are certainly obstacles, and the stock may continue to face short-term pressures as consumer sentiment wavers, long-term investors might want to keep a close eye on this dip as an entry point. Personally, I believe there is substantial support in the lower $90 range.

In spite of the recent analyst downgrade and concerns about Chinese growth, I maintain an optimistic outlook, in line with Mad Money host Jim Cramer, who recently stated that it’s “a mistake to hate” SBUX. Notably, he has a stake in the stock through his charitable trust.

With its key growth market of China facing challenges, Starbucks could indeed be worth considering as it embarks on what could be a highly profitable expansion when economic tides turn.

Featured Image: Unsplash @ June Andrei George

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